23 May 2013 IFA Round Table, Q. 10

Are there any new issues with respect to Article IV(6) and (7) of the US treaty?

Response

: Since the 5th Protocol to the Canada-U.S. Treaty, CRA has considered many strategies designed to ensure that either Art. IV, para. 6 applies to a particular amount, or that para. (7) of that Article does not apply, along with the possible application of the general anti-avoidance rule. CRA has recognized that some structures may be utilized for legitimate reasons. Among the strategies previously considered, the CRA is aware of some structures designed to avoid the application of para. (7) through the introduction of an interposing entity located in a third jurisdiction. In this regard, the CRA has previously expressed its long-standing concerns over "treaty shopping;" and Finance bolstered these concerns in Budget 2013, in announcing consultations on these practices. In addition, the GAAR Committee recently approved the application of the GAAR to a treaty shopping case. Accordingly, taxpayers should not expect the Directorate to look favourably upon the interposition of an entity in a third jurisdiction to avoid the application of para. (7).

Are there any new issues with respect to the services PE provision in the Article V of the US treaty?

Response

:

The Directorate recently ruled on the applicability of Art. V of the Treaty to a US resident corporation ("USco") carrying on a web-based business, which entailed the sale of advertising space on its websites to Canadian-resident businesses, and the sale of digital content by Canadian resident software developers. A Canadian resident subsidiary of USco ("Canco") was to build and operate a data centre consisting of numerous servers in Canada, and use that data centre to provide website and data hosting services to USco. USco would pay Canco an arm's length fee for these services. Canco would not have the authority to legally bind USco, and would not provide any services to Canadian resident users, advertisers or software developers. Employees of USco would not have unsupervised access to the servers, although they would be able to manage the software and data on the servers through remote access.

CRA considered the fixed base PE provision in para. (1) of Art. V, the agency PE provision in para. (5), and the services PE provision in subpara. (9)(b), and ruled that USco would not carry on a business through a PE in Canada. CRA noted that USco also had another Canadian subsidiary providing services to USco in connection with marketing and sales support activities for USco's development and expansion of its user, advertiser and software developer base in Canada, but was not asked to and did not address how this might affect the PE issue.