25 April 1997 GST/HST Interpretation HQR0000296[2] - Non-Resident Permanent Establishment and Security Requirement

                                                                        File 11680-4(RMcK)

                                                                        April 25, 1997

I refer to your E-mail message of September 19, 1996 concerning non-resident Permanent Establishment (PE) and changes to the security requirements.

In your facsimile message you state that:

Non-residents appear to be avoiding the requirement to post security by relying on the office of their agent or broker to be their P.E.

You are of the opinion that shell corporations are being set up to manage the affairs of non-residents carrying on business in Canada. Specifically, they contend that they have a P.E. in Canada as they fit into paragraph (b) of the definition of P.E. in Section 123 of the Excise Tax Act (the Act)

You have raised the following issues:

What constitutes a P.E.?

What are the requirements to post security based on the proposed amendments to the Act?

General Comments

Section 123 of the Act defines the term "permanent establishment" to be the fixed place of business, including a place of management, branch, office, factory, workshop, mine, oil or gas well, quarry, timberland, or other place of extraction of mineral resources through which supplies are made. In addition, the permanent establishment of a person includes the fixed place of business of another person (other than a broker, general commission agent, or other independent agent) making supplies on behalf of the person in the ordinary course of business.

A current example used by the Department to illustrate the point refers to a situation where Mr. A maintains an office in Montreal and acts in Canada on behalf of Z Corporation (a US. Corporation) in making supplies in the ordinary course of business, Z Corporation will be considered to have a permanent establishment in Canada. If, however

Mr. A makes these supplies in his capacity as a broker, general commission agent, or other independent agent, Z Corporation will not be considered to have a permanent establishment in Canada solely by virtue of its relationship with Mr. A. If a person is not carrying on a business there is no need to determine if the person has a permanent establishment, since there are no GST implications in making that determination. Similarly, if a person is carrying on a business, and that business is not carried on in Canada, there is no need to determine if that person has a P.E. in Canada, since there are no GST implications in making that determination. Thus an office in Canada of a non-resident does not qualify as a P.E. unless a business of the non-resident is being carried on through that office.

The question that has to be answered is whether any supplies are being made through a fixed place of business of the non-resident or through the other persons fixed place of business in Canada? For example, are any orders being solicited, orders taken, or contracts arranged for customers etc. by someone other than the non-resident. If supplies are not being made through the person then a permanent establishment does not exist for purposes of the GST.

It is a question of fact as to whether a non-resident has a P.E. in Canada or not, each case must be examined to determine whether the PE exists in Canada and whether the non-residents are carrying on a business in Canada.

Policy P-208 on the database deals with the phrase "fixed place of business" and the phrase "through which the particular person makes supplies" as these phrases appear in paragraph (a) of the definition of permanent establishment in subsection 123(1) of the Excise Tax Act. This policy provides more information which will enable you to deal with the issue of permanent establishment.

With respect to the security issue, the amendment to subsection 240(6) of the Act indicates that effective April 24, 1997, non-resident registrants or non-resident persons who apply to be registered and who make supplies in Canada other than through their own fixed place of business in Canada will be required to post security in an amount satisfactory to the Minister of National Revenue. Furthermore, such non-resident registrants, will have to post security based on their net tax "Net Tax" is defined as the positive or negative amount resulting from subtracting all input tax credits claimed in a return for a reporting period from all GST collected or collectible for the same period.

The effect of the above change is twofold:

1) Non-resident registrants who previously did not have to post security because their PE in Canada was a fixed place of business of another person acting in Canada on behalf of the non-resident, will now have to post security.

2) Non-resident registrants who regularly file credit returns (a negative net tax) and who had to post the minimum amount of security or did not have to post any security, may now have to post additional security.

The amount of security to be posted for those non-residents who remit GST on a regular basis has not changed.

In addition, non-residents who file returns with a net tax equal to or less than $3,000 either remitted or refunded and whose supplies made in Canada do not exceed $100,000 on an annual basis are not required to post security.

If under the new rules non-resident registrants are required to post security or increase their security with the Department, the amount of security required will be 50% of net tax with a minimum of $5,000 and a maximum of $1,000,000 (one million).

With respect to the issue of shell companies it should be noted that it is a question of fact as to whether a person has a P.E. in Canada and is making any supplies through that entity. If the shell Corporation is incorporated in Canada, it is deemed to be resident of Canada by virtue of Section 132 of the Act. If it is carrying on commercial activities and makes supplies it is required to register.

It is not possible to make a pronouncement that everyone will fit a single set of circumstances, every case must be examined on its own merits to determine if it qualifies as a permanent establishment.

Roy McKain
Senior Policy Officer
Border Issues Unit
General Operations and Border Issues Division
GST Rulings and Interpretations
Policy and Legislation Branch            GOBI: HQR0000296