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: When interpreting paragraph 2(c) of Article 15 of Canada's income tax conventions, is the term "permanent establishment" to be determined under the treaty between Canada and the employer's country of residence, or between Canada and the employee's country of residence?
Position: The employee's country of residence.
Reasons: While there are strong arguments in favour of both sides, the better view is to refer to the treaty between Canada and the employee's country of residence to determine if the employer has a permanent establishment in Canada for purposes of Article 15.
January 25, 2010
Paul Lynch HEADQUARTERS
Director General Income Tax Rulings
Tax Appeals and Charities Directorate Directorate
S.E. Thomson
(613) 957-2122
2009-031995
Interpretation of Article 15 - Income From Employment
This is in response to a letter to you from XXXXXXXXXX on April 28, 2009, which was forwarded to us for reply. The issue arose as a result of a payroll audit of BCo. The letter involves the interpretation of the "Income From Employment" article of Canada's income tax treaties.
The Facts
The facts as presented to us are as follows:
1. ACo is a British company that performed seismic surveys offshore Canada for XXXXXXXXXX months during XXXXXXXXXX (endnote 1) .
2. BCo is a Norwegian company that provided a crew to Aco under a "Secondment and Services Agreement" to work in Canada during the period. XXXXXXXXXX has concluded that the Secondment and Services Agreement was in fact a service agreement. BCo carried on business in Canada and had a permanent establishment in Canada pursuant to Article 21 - Offshore Activities of the Canada-Norway Tax Convention.
3. The employees of BCo working in Canada were resident in various countries (Australia, France, Netherlands, Brazil, Egypt, U.K., Norway, U.S., Sweden and Denmark). All of the employees were present in Canada for less than 183 days.
4. BCo did not have a permanent establishment in Canada during the relevant period under the terms of some of the treaties between Canada and the countries where the employees are resident. However, under other treaties, BCo did have a permanent establishment in Canada.
Issue #1 - Which treaty determines whether the employer has a permanent establishment?
The Income From Employment articles in Canada's treaties with the countries where the employees were resident are generally similar to Article 15 of the OECD Model Tax Convention on Income and on Capital (the "OECD Model"). Paragraph 2 of Article 15 of the OECD Model reads as follows:
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve month period commencing or ending in the calendar year concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c) the remuneration is not borne by a permanent establishment which the employer has in the other State.
The question is whether, in applying subparagraph 2(c) of Article 15, we look to the treaty between Canada and the employer's country (i.e. Norway in this case) to determine whether BCo has a PE in Canada, or whether we look to the treaty between Canada and the employee's country.
This question is a difficult one, and strong arguments have been put forward on both sides. XXXXXXXXXX
In our opinion, the better approach is to adopt the position in favour of the meaning of "permanent establishment" in the employee's treaty. That is, in applying subparagraph 2(c) of the "Income From Employment" article of Canada's income tax treaties, we will look to the treaty between Canada and the country where the employee is resident to determine if the employer has a PE in Canada.
Issue #2 - Interaction of subparagraphs 2(a), (b) and (c) of Article 15
XXXXXXXXXX That is, all of the conditions in subparagraphs 2(a), (b) and (c) of Article 15 must be met before the employee may NOT be taxed in Canada.
Paragraph 1 of Article 15 of the OECD Model gives Canada the right to tax remuneration paid to a resident of the other contracting state where the employment is exercised in Canada. Paragraph 2 sets outs exceptions to paragraph 1. The preamble to paragraph 2 states that notwithstanding paragraph 1, remuneration shall be taxable ONLY in the state of residence if all of the conditions in subparagraph (a), (b) and (c) are met. Therefore, if one of conditions is not met, then the remuneration may be taxed in Canada as well as the state of residence. To avoid double taxation, the state of residence would generally provide a foreign tax credit.
Issue #3 - Application of Individual Treaties to the Employees
XXXXXXXXXX has asked for our opinion on the application of each of the treaties between Canada and the employees' countries of residence.
A) Canada-Sweden Income Tax Convention ("Canada-Sweden Treaty")
We assume that BCo does not have a PE in Canada under Article 5 - Permanent Establishment of the Canada-Sweden Treaty. Paragraph 2 of Article 15 of the Canada-Sweden Treaty is similar to the OECD Model. All of the conditions in paragraph 2 of Article 15 appear to be met. Therefore, remuneration paid by BCo to employees who are resident in Sweden is exempt from tax in Canada.
B) Canada-Australia Income Tax Convention ("Canada-Australia Treaty")
We assume that BCo does not have a PE in Canada under Article 5 - Permanent Establishment of the Canada-Australia Treaty. Paragraph 2 of Article 15 of the Canada-Australia Treaty is similar to the OECD Model. All of the conditions in paragraph 2 of Article 15 appear to be met. Therefore, remuneration paid by BCo to employees who are resident in Australia is exempt from tax in Canada.
C) Canada-Norway Tax Convention ("Canada-Norway Treaty")
Paragraph 1 of Article 21 of the Canada-Norway Treaty - Offshore Activities states that Article 21 applies notwithstanding any other provision of the treaty. Therefore, Article 21 overrides Articles 5 and 15.
Subparagraph 5(a) of Article 21 states that (subject to subparagraph (b) which does not appear to apply) remuneration derived by an employee who is resident in Norway in respect of employment connected with the exploration or exploitation of the seabed and subsoil and their natural resources situated in Canada may be taxed in Canada, but only if the employment exceeds 30 days in any 12-month period. Therefore, if the employment exceeds 30 days, remuneration paid by BCo to employees who are resident in Norway may be taxed in Canada.
D) Canada-Netherlands Income Tax Convention ("Canada-Netherlands Treaty")
The Canada-Netherlands Treaty contains Article 23 - Offshore Activities. Paragraph 1 of Article 23 states that Article 23 applies notwithstanding any other provision of the treaty. However, to the extent that BCo already has a PE in Canada by virtue of Article 5, Article 23 will not apply. We assume that BCo does not have a PE in Canada under Article 5 of the Canada-Netherlands Treaty.
Paragraph 3 of Article 23 provides (subject to paragraph 4 which does not appear to apply) that "an enterprise of one of the States" will be deemed to be carrying on business in Canada through a permanent establishment if the enterprise carries on Offshore Activities in Canada for more than 30 days in any 12 month period. Since BCo is not an "enterprise of one of the States" (i.e. either Canada or the Netherlands), paragraph 3 of Article 23 does not apply. Therefore BCo does not have a PE in Canada for purposes of the Canada-Netherlands Treaty.
Paragraph 2 of Article 15 is similar to the OECD Model. Since BCo does not have a PE in Canada, all of the conditions in paragraph 2 of Article 15 appear to be met. Paragraph 6 of Article 23 does not override Article 15 because BCo does not have a PE in Canada under the Canada-Netherlands Treaty. Therefore, remuneration paid by BCo to employees who are resident in the Netherlands is exempt from tax in Canada.
E) Canada-U.K. Income Tax Convention ("Canada-U.K. Treaty")
The Canada-U.K. Treaty contains Article 27A - Miscellaneous Rules Applicable to Certain Offshore Activities. Article 27A applies notwithstanding any other provision of the treaty. We assume that BCo does not have a PE in Canada under Article 5 of the Canada-U.K. Treaty.
Paragraph 2 of Article 27A provides that "A person who is a resident of a Contracting State" will be deemed to be carrying on a business in Canada through a permanent establishment if the person carries on activities in Canada in connection with exploration or exploitation of the seabed and subsoil and their natural resources in Canada. Since BCo is not a resident of one of the Contracting States" (i.e. either Canada or the U.K.), paragraph 2 of Article 27A does not apply. Therefore BCo does not have a PE in Canada for purposes of the Canada-U.K. treaty.
Paragraph 2 of Article 15 is similar to the OECD Model. Since BCo does not have a PE in Canada under the Canada-U.K. Treaty, all of the conditions in paragraph 2 of Article 15 appear to be met.
However, Article 27A overrides Article 15. Paragraph 4 of Article 27A states that remuneration derived by an employee who is resident in the U.K. from the above activities in Canada may be taxed in Canada, without regard to whether or not the employer has a PE in Canada. Therefore, remuneration paid by BCo to employees who are resident in the U.K. may be taxed in Canada.
F) Canada-France Tax Convention ("Canada-France Treaty")
We assume that BCo does not have a PE in Canada under Article 5 - Permanent Establishment of the Canada-France Treaty. Paragraph 2 of Article 15 of the Canada-France Treaty is similar to the OECD Model. All of the conditions in paragraph 2 of Article 15 appear to be met. Therefore, remuneration paid by BCo to employees who are resident in France is exempt from tax in Canada.
G) Canada-Denmark Tax Convention ("Canada-Denmark Treaty")
We assume that BCo does not have a PE in Canada under Article 5 of the Canada-Denmark Treaty. The Canada-Denmark Treaty contains Article 27 - Activities in Connection with Preliminary Surveys, Exploration or Extraction of Hydrocarbons. Paragraph 1 of Article 27 deems a person who is a "resident of a Contracting State" to be carrying on a business through a PE if the person carries on the activities described. Since BCo is not a resident of a Contracting State (i.e. Canada or Denmark), BCo does not have a PE in Canada for purposes of the Canada-Denmark Treaty.
Paragraph 2 of Article 15 is similar to the OECD Model. Since BCo does not have a PE in Canada under the Canada-Denmark Treaty, all of the conditions in paragraph 2 of Article 15 appear to have been met. Therefore, remuneration paid by BCo to employees who are resident in Denmark is exempt from tax in Canada.
H) Canada-Egypt Income Tax Convention ("Canada-Egypt Treaty")
We assume that BCo does not have a PE in Canada under Article 5 - Permanent Establishment of the Canada-Egypt Treaty. Paragraph 2 of Article 15 of the Canada-Egypt Treaty is similar to the OECD Model, except that the threshold in subparagraph 2(a) of Article 15 of the Canada-Egypt Treaty is 90 days, rather than 183 days. Therefore, if the employees who are resident in Egypt are present in Canada for more than 90 days in the calendar year, not all of the conditions in paragraph 2 of Article 15 will be met, and remuneration paid by BCo to those employees may be taxed in Canada.
I) Canada-Brazil Income Tax Convention ("Canada-Brazil Treaty")
We assume that BCo does not have a PE in Canada under Article 5 - Permanent Establishment of the Canada-Brazil Treaty. Paragraph 2 of Article 15 of the Canada-Brazil Treaty is similar to the OECD Model. All of the conditions in paragraph 2 of Article 15 appear to be met.
Therefore, remuneration paid by BCo to employees who are resident in Brazil is exempt from tax in Canada.
J) Canada-U.S. Tax Convention ("Canada-U.S. Treaty")
In XXXXXXXXXX , the Fourth Protocol to the Canada-U.S. Treaty was in effect. We assume that BCo did not have a PE in Canada under Article 5 - Permanent Establishment of the Fourth Protocol.
Paragraph 2 of Article 15 of the Fourth Protocol deviated slightly from the OECD Model. It read,
Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in a calendar year in the other Contracting State shall be taxable only in the first-mentioned State if:
(a) such remuneration does not exceed ten thousand dollars ($10,000) in the currency of that other State; or
(b) the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in that year and the remuneration is not borne by an employer who is a resident of that other State or by a permanent establishment or a fixed base which the employer has in that other State.
All of the conditions in subparagraph 2(b) of Article 15 appear to be met. Therefore, remuneration paid by BCo to employees who are resident in the U.S. is exempt from tax in Canada.
We trust that we have been of some assistance.
Yours truly,
Olli Laurikainen
For Director
International & Trusts Division
Income Tax Rulings Directorate
cc: XXXXXXXXXX
ENDNOTES
1 We assume that "offshore Canada" means in "Canada", as defined in Article 3 of Canada's income tax treaties.
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