Kevyn Nightingale, Amir Pourzakikhani, "A Federal Permanent Establishment, But Not a Provincial One", Tax Topics, Wolters Kluwer, November 3, 2016, No. 2330, p. 1

U.S. resident with Cdn Services PE only (pp. 1-2)

We recently dealt with a situation where a non-resident individual taxpayer had a Permanent Establishment ("PE") for federal tax purposes, but no PE for provincial tax purposes….CRA ultimately agreed with the position.

The taxpayer was a resident of the United States. He worked as a self-employed contractor in Canada. Substantially all of his income was earned for services physically provided in Canada. He worked at the premises of his client and at 3rd-party locations, and did not have dominion or control over any place of business in Canada. He did not habitually conclude contracts while present in Canada.

He spent more than 182 days physically present in Canada each year.

In response to [Dudney] the treaty was changed to deem a…Services PE.

Provincial tax for individuals based on factual PE, not Services PE (pp. 2-3)

Tax is levied only on income earned in the province. The meaning of that term is defined [in s. 120(4)] by importing the federal regulations, including the meaning of a "permanent establishment" (a "Factual PE"). …

Without a Factual PE, no income is allocated to a province. This is true for each of the "agreeing" provinces…

Consequently, this income is taxable in Canada, but not earned in a province. It is subject to the federal surtax, which is 48% of the federal tax otherwise payable.[under s. 120(1).] …

In our view, it's the right answer. Consider a situation where the taxpayer worked for over 182 days in Canada but did not exceed that threshold in any one province. How would one impute the PE to any province? One could create a regulation that allocates the income by days worked, as is done for employees, but there is currently no equivalent provision for a business.

Same result for non-resident corporations with only Services PE (pp. 2-3)

We believe the same is true for corporations in the general sense (excluding banks, airlines, etc. …

Ontario was not an "agreeing province" for corporate tax until 2009, and Alberta still is not. However, both provinces' definitions essentially parallel the federal one, so the result is the same.

[from p. 1 of article:]

[P]rovincial rates run from 12% to 16%. The loss of the provincial abatement effects tax at 10% [citing s. 124(1)], so this answer is unambiguously better.

CRA recently agreed with the position of a U.S.-resident individual who had a services permanent establishment in Canada under the Canada-U.S. Treaty but did not otherwise have a Canadian permanent establishment, that he did not earn income in any province. Accordingly, rather than being subject to provincial tax on his servicing income, he was subject to additional federal tax thereon of only 48% of federal tax.

The same analysis would apply (at least for the common law provinces) to a U.S. corporation which had only a Canadian services PE, so that it would enjoy an additional federal rate of 10% (in effect imposed under s. 124(1)) rather than facing provincial rates running from 12% to 16%.