22 October 2004 GST/HST Interpretation 38169 - Supplies by Social Workers Proposed Section 7.2 of Part II of Schedule V to the Excise Tax Act

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the Canada Revenue Agency's ("CRA") interpretation of permanent establishment for GST purposes. I apologize for the delay in replying to your letter.

The following information was presented in your letter.

•   ParentCo, a corporation incorporated in the United States, is a non-resident of Canada.

•   USCo, a wholly owned subsidiary of ParentCo, is incorporated in the United States and has no presence (place of business, employees, sales representatives, bank account, telephone directory listing, etc.) in Canada.

•   CanCo, also a wholly owned subsidiary of ParentCo, is incorporated in Canada and carries on business in Canada.

•   USCo contracts, in the United States, to provide "call centre" assistance services to customers in the United States and Canada.

•   USCo invoices customers for services rendered.

•   USCo has subcontracted with CanCo to provide some of these assistance services through a CanCo facility in Canada.

•   Telephone calls from customers in the United States may be routed through USCo to CanCo.

•   USCo pays CanCo on an arm's length "cost plus" basis for the subcontracted services.

•   CanCo is not acting as an agent of USCo. USCo and CanCo have not consented, explicitly or implicitly, to an agency relationship. CanCo has no authority to contract on behalf of USCo and does not advertise or promote the services offered by USCo.

Interpretation Requested

Do the activities of CanCo constitute a permanent establishment of USCo for the purposes of paragraph (b) of the definition of "permanent establishment" in subsection 123(1) of the Excise Tax Act ("the Act")?

Interpretation Given

"Permanent establishment" in respect of a particular person, as defined in part in paragraph (b) of the definition, means a fixed place of business of another person (other than a broker, general commission agent or other independent agent acting in the ordinary course of business) who is acting in Canada on behalf of the particular person and through whom the particular person makes supplies in the ordinary course of business.

The CRA's interpretation of the term, "permanent establishment" for GST purposes is set out in the enclosed draft revised GST/HST Policy Statement P-208R. This draft policy statement was released on July 7, 2004, for public comments due by October 29, 2004.

Whether a particular person has a permanent establishment is a question of fact that may be determined by applying the principles set out in the policy to the facts of each case. Section II of the Policy sets out the CRA's interpretation of paragraph (b) of the definition.

The type of person referred to in paragraph (b) is a person who is acting in Canada as an agent of the particular person other than an independent agent acting in the ordinary course of its business. Such a person is commonly referred to as a dependent agent.

Whether a person is considered to be an agent for GST/HST purposes is based on a determination of fact and an application of principles of law. For an explanation of the application of law that would apply in determining whether an agency relationship may exist in a particular situation, reference should be made to the enclosed GST/HST Policy Statement P-182R, Agency.

Generally, an agent will be considered to be independent if the agent is both legally and economically independent of the principal on whose behalf the agent is acting. Indicative factors to be considered in determining whether an agent is independent of the principal on whose behalf the agent is acting in a particular situation would include:

•   Whether the agent is subject to detailed instructions or to comprehensive control by the principal (typically, an independent agent will not be subject to significant control by the principal in terms of how to carry out its work, nor subject to detailed instructions from the principal with respect to the conduct of the work. The principal in this case will be more interested in the results of the agent's work and rely on the special knowledge, skill or strength of the agent);

•   Whether the entrepreneurial risk must be borne by the agent or the principal;

•   Whether the agent sells goods in its own name rather than in the name of the principal; and

•   Whether the agent acts as an agent for other persons.

In determining whether an independent agent is acting in the ordinary course of its business with respect to particular activities, consideration should be given as to whether those activities are typical of the activities that would usually be carried out in the course of the particular trade, as the case may be, of the independent agent.

In order for paragraph (b) to apply, it must be established that the dependent agent has its own fixed place of business. Such a determination will be based on principles in Section 1 of the policy to determine whether a particular person has a fixed place of business.

It must also be established that the dependent agent is a person through whom the particular person is making supplies. This does not necessarily require that the dependent agent must have the authority to conclude contracts on behalf of the particular person. Whether a particular person is considered to be making supplies through the dependent agent in a particular situation will be based on the existence of factors such as those listed in Section 1 of the policy to determine whether supplies are made through a fixed place of business.

From the information presented, CanCo is not an agent, let alone a dependent agent of USCo. Therefore, USCo would not be considered to have a permanent establishment in Canada under paragraph (b) of the definition of "permanent establishment".

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-6743.

Yours truly,

Cheryl R. Leyton
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2004/10/21 — RITS 38435 — Drop-Shipment Rules: Storage Fees