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.
Principal Issues: Did a U.S. corporation carry on business in Canada through permanent establishments in Canada?
Position: According to the facts provided to us, it is our understanding that the corporation carried on business in Canada through permanent establisments. However, an examination of all the relevant facts would be required to provide a definitive answer.
Reasons: The corporation carried on a business of sale of goods that it did not manufacture. Employees or agents of the U.S. corporation solicits orders through the XXXXXXXXXX offices leased by the corporation in Canada.
November 20, 2006
Prem Bobal HEADQUARTERS
Appeals Division Income Tax Rulings
875 Heron Road, 2nd Floor Directorate
Ottawa ON K1A 1A2 Sylvie Labarre
(613) 957-8953
2006-019443
XXXXXXXXXX
We are writing in response to your memorandum of June 29, 2006 in which you asked for our views on whether or not XXXXXXXXXX (hereinafter the "corporation") carried on business in Canada through Canadian permanent establishments for purpose of the Income Tax Act (hereinafter the "Act") from XXXXXXXXXX until XXXXXXXXXX.
Facts
The representative of the corporation provided you the following information with respect to the corporation which has engaged in activities in Canada from XXXXXXXXXX until at least XXXXXXXXXX (the "period").
Business of the corporation
The corporation was incorporated in the United States in XXXXXXXXXX.
The corporation carries out marketing, sales, logistics and related services with respect to products manufactured outside Canada. The corporation acquires products from related parties and supplies such products to customers across North America.
Since XXXXXXXXXX, the corporation has contracted with an unrelated Canadian-resident party (the "Canadian services provider") for the use of employees in Canada (the "Canadian Contract-Employees").
The corporation has also leased XXXXXXXXXX offices in Canada from the Canadian services provider. XXXXXXXXXX. The Canadian Contract-Employees conduct their activities through these Canadian offices.
Products are generally shipped directly to Canadian customers of the corporation from outside Canada. In the case of XXXXXXXXXX major customers, goods are stored in dedicated warehouses located in XXXXXXXXXX (one for each customer). Each warehouse is operated by an unrelated third party. The corporation retains title to these goods until taken from the warehouse by the customer.
The Canadian Contract-Employees are not involved in the warehousing activities, nor are they involved in any other logistical element of delivering products to Canadian customers.
Total sales by the corporation into Canada (both supplies from warehouses and direct supplies from the US) during the period ranged from $XXXXXXXXXX to $XXXXXXXXXX per year.
Canadian Contract-Employees
By XXXXXXXXXX, there were XXXXXXXXXX Canadian Contract-Employees in Canada. XXXXXXXXXX.
The Canadian services provider is reimbursed by the corporation for the cost of providing the employee services to the corporation and receives a fee from the corporation for its services.
The Canadian Contract-Employees support the corporation's sales of products to the Canadian market. Activities of the XXXXXXXXXX Canadian Contract-Employees consist primarily of servicing the corporation's existing customers, including providing information about products supplied by the corporation, dealing with inquiries and complaints relating to products, invoices, etc.
Ancillary to the activities mentioned above, the Canadian Contract-Employees are also involved, to a limited extent, in marketing the corporation's products and sales solicitation.
During the period, the Canadian Contract-Employees were supervised by the corporation.
While the Canadian Contract-Employees may negotiate some terms and conditions of contracts, they do not have and have never had the authority to conclude contracts on behalf of the corporation. All sales contracts (including those entered into during the period) are reviewed and either approved or rejected by the corporation in the US. If approved, contracts are entered into in the US by US employees of the corporation.
Warehouses and Customs Duties
Warehousing logistics and management are handled by US employees of the corporation in the US. As noted above, the Canadian Contract-Employees have no involvement with the warehouses.
XXXXXXXXXX.
The corporation retains title to the goods until they are accepted for delivery from the warehouse by the customer.
Question
Was the corporation carrying on business in Canada through Canadian permanent establishments for purpose of the Act during the period?
Canadian income tax is applied to non-resident persons who carried on a business in Canada. However, in accordance with Canada's income tax treaties, the business income of a non-resident is generally taxable in the country of residence only, unless a taxpayer has a permanent establishment in Canada. The Canada-U.S. Income Tax Convention (the "Convention") does not provide differently.
For the purposes of this memorandum, we assume that the corporation is a resident of the United States.
Determining whether a non-resident is "carrying on business in Canada" pursuant to paragraph 2(3)(b) of the Act is always a question of fact that is generally the Tax Services Office's responsibility. We offer the following comments, based on the facts provided to us by the representative.
We generally follow a three-step approach. First, we determine whether there is a "business", as defined in subsection 248(1) of the Act. Second, if there is a "business", we determine whether it is "carried on", which generally requires some continuity and regularity.
According to the representative of the corporation, the corporation carries out marketing, sales, logistics and related services with respect to products manufactured outside Canada. The corporation acquires products from related parties and supplies such products to customers across North America. In our view, these activities constitute a business, as defined in subsection 248(1) of the Act. Furthermore, it seems to us that these activities are performed regularly and with continuity. Therefore, the corporation carries on business.
The third step is to determine whether the business is carried on "in Canada". Note that the "in Canada" determination does not involve "time" or "regularity" or "continuity". Those principles apply in determining whether a business is "carried on". As a result, there is no requirement that the profit producing activities be performed with regularity or continuity in Canada in order for the business to be carried on in Canada.
The third step requires that we consider a list of factors that essentially attempt to identify the place of the profit producing activities (the Common-Law Tests). These factors include: the place where the business' profit-producing contracts are concluded; the place where agents or employees of the non-resident are located; the place of delivery; the place of payment; the place where the purchases are made; the place from which transactions are solicited; the location of an inventory of goods; the location of the bank account; the place where the non-resident's name and business are listed in a directory; the location of a branch office. Generally, in traditional forms of business (i.e. non e-commerce), such as the sale of goods, the most determinative factor that the courts consider is place of contract. However, in a particular situation, other factors may be determinative.
After having reviewed that list of factors in a particular situation, we could arrive at the conclusion that, in that particular situation, a business is not carried on in Canada according to the Common-Law Tests. In such a case, the extended meaning of "carrying on business in Canada" would have to be considered. That extended meaning is found in section 253 of the Act. Paragraph 253(b) provides that where in a taxation year a person who is a non-resident person solicits orders or offers anything for sale in Canada through an agent or servant (whether the contract or transaction is to be completed inside or outside Canada or partly inside and partly outside Canada), the non-resident person will be deemed in respect of the activity to have been carrying on business in Canada in the year.
In the present situation, an examination of all the relevant facts would be required to remove any doubt as to whether the corporation carried on a business in Canada under the Common-Law Tests. However, we understand that the corporation solicited orders in Canada during the period. It is likely that was done in part through the U.S. employees or agents of the corporation and in part through the Canadian Contract-Employees (we suppose that the Canadian Contract-Employees are employees or agents of the corporation). The representative does not suggest otherwise. Therefore, in our view, the corporation was deemed to have been carrying on business in Canada during the period pursuant to paragraph 253(b) of the Act.
Pursuant to paragraph 1 of Article VII of the Convention, the business profit of a resident of the United States shall be taxable only in United States unless the resident carries on business in Canada through a permanent establishment situated in Canada. If the U.S. resident carries on, or has carried on, business, the business profits of the U.S. resident may be taxed in Canada but only so much of them as is attributable to that permanent establishment.
Paragraph 1 of Article V of the Convention provides that, for the purposes of the Convention, the term "permanent establishment" means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on.
Pursuant to paragraph 6 of Article V, the term "permanent establishment" shall be deemed not to include a fixed place of business used solely for one or more of the following activities:
(a) the use of facilities for the purpose of storage, display or delivery of goods or merchandise belonging to the resident;
(b) the maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery;
(c) ...
(d) the purchase of goods or merchandise, or the collection of information, for the resident;
(e) advertising, the supply of information, scientific research or similar activities which have a preparatory or auxiliary character, for the resident. According to the facts provided by the representative of the corporation, the XXXXXXXXXX warehouses would not be permanent establishments pursuant to paragraph 6 of Article V.
In our view, the leased offices located in XXXXXXXXXX are fixed places of business. As the Canadian-Contract employees are involved in sales solicitation, there is at least a part of the essential activity of the business (the sales solicitation) that is carried on through the offices located in XXXXXXXXXX, even if this is the case only to a limited extent. If an examination of all the relevant facts was conducted, we could realize that other essential activities are carried on through these offices. In our view, the XXXXXXXXXX offices located in XXXXXXXXXX are permanent establishments of the corporation. Paragraph 6 of Article V of the Convention would not be applicable in relation to the offices located in XXXXXXXXXX because the XXXXXXXXXX offices are not used solely for the activities mentioned in that paragraph.
As the corporation has carried on business during the period through permanent establishments in Canada (the XXXXXXXXXX offices), the business profits of the corporation are taxable in Canada but only so much of them as is attributable to the XXXXXXXXXX offices.
Our comments are based on the facts provided by the representative of the corporation. An examination of all the relevant facts in the particular situation (which is beyond the mandate of our Directorate) would provide a definitive conclusion. The determination of the profits of the corporation that is attributable to the permanent establishments in Canada is also beyond the mandate of our Directorate.
We trust that our comments will be of assistance.
Yours truly
Alain Godin
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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