CRA finds that a US LLC did not have a Canadian PE where a former employee serviced its U.S. clients from his Canadian home office under pass-through payroll arrangement
CRA ruled that the emigration to Canada of a portfolio manager (“Can Worker”), who had been employed in the U.S. office of an investments manager (an LLC), with Can Worker thereafter doing the same work from his home office (in his Canadian home), did not cause the LLC to acquire a permanent establishment in Canada under Art. V of the Canada-U.S. Treaty.
This conclusion likely was assisted by some structuring, namely, Can Worker ceased to be an employee (although he continued to be a shareholder of the LLC). Instead, he was now employed and remunerated by a special-purpose Canadian subsidiary of an arm’s length non-resident services firm which, in turn, charged service fees to the LLC.
Can Worker had no authority to contract on behalf of the LLC, his home office was not identified with the LLC’s business of manager, and his office’s expenses were not borne by the LLC (although it reimbursed Can Worker for costs of travel to and from the U.S. to meet clients or prospects, and his computer was owned by the LLC and connected to its network.)
The services PE rule in Art. V(9) was irrelevant since it was U.S. clients who were being serviced, and well under 50% of the revenue of the LLC was derived from the services performed by Can Worker.
Neal Armstrong. Summary of 2018 Ruling 2017-0713071R3 under Treaties – Income Tax Conventions – Art. 5.