25 April 2000 GST/HST Interpretation 8228 - Permanent Establishment - Paragraph (b) of the Definition in Subsection 123(1)

Dear Sir:

This is in reply to XXXXX [l]etter of June 1, 1999 concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to the activities of non-residents in Canada. We regret the delay in responding.

Interpretation Requested

1. That employees or agents at law located at the fixed place of business of another person in Canada who have the authority to contract on behalf of a non-resident person do not constitute a permanent establishment under paragraph (a) of the definition of permanent establishment in subsection 123(1).

2. That in order for a non-resident person to have a permanent establishment in Canada under paragraph (b) of the definition of permanent establishment in subsection 123(1) , the person who is acting on behalf of the non-resident person in Canada must have a fixed place of business in Canada through which the non-resident person is making supplies.

3. Revenue Canada's interpretation of "who is acting in Canada on behalf of the particular person" e.g. agent under common law principles, exclusive sales agent, etc. for purposes of the paragraph (b) of the subsection 123(1) definition of permanent establishment.

Interpretation Given

Question #1

Employees or agents located at the fixed place of business in Canada of a separate legal entity from their employer or principal may constitute a permanent establishment for their employer or principal under paragraph (a) of the definition "permanent establishment" in subsection 123(1) of the Excise Tax Act (Act).

A person may be considered to have a fixed place of business at the place where its employees or agents are located. The non-resident need not own or lease the space in order for it to constitute a fixed place of business. Rather solely having the right to use the space is sufficient. The fact that the space is a fixed place of business of one particular person does not preclude the possibility that that space may also be considered to be a fixed place of business of another particular person. This determination will be made according to the accepted rules as to what constitutes a fixed place of business (see Policy Statement [P-]208, Meaning of the phrase "fixed place of business" and the phrase "through which the particular person makes supplies", copy enclosed).

Question #2

In order for a non-resident person to have a permanent establishment in Canada under paragraph (b) of the definition "permanent establishment" in subsection 123(1) of the Act, the person acting on behalf of the non-resident must have a fixed place of business in Canada through which the non-resident is making supplies.

In order to determine whether the person has a fixed place of business one may use the same criteria as outlined in Policy Statement [P-]208. The facts of each case must be examined on their own merits in order to determine if the person acting on behalf of the non-resident could be considered to have a fixed place of business.

Question #3

For purposes of paragraph (b) of subsection 123(1) of the Act, the words "who is acting on behalf of the particular person" are further qualified by the exclusion of brokers, general commission agents or other independent agents acting in the ordinary course of business. Therefore in determining the type of persons that would be included in paragraph (b) one must read the words together, as a whole. Persons that would be included in paragraph (b) are agents that are not independent of their principal.

The words "who is acting on behalf of the particular person" are words that normally describe the activities of an agent. While there are no precise tests to determine whether a person is an independent agent of another person, a general authority to handle the principal's affairs without detailed interference, indicates independent status. One may consider the following guidelines when determining whether the agent is independent:

•   whether the person is independent both legally and economically;

•   whether the person is subject to detailed instructions or to comprehensive control by the other person;

•   whether the entrepreneurial risk is borne by the person or the other person the person represents;

•   whether the person sells goods in his own name rather than in the name of the other person;

•   whether the person receives title to the goods and bears risk of loss upon delivery;

•   whether the person is referred to as an independent contractor rather than an agent;

•   whether the person must pay the other person for goods received, whether the goods are subsequently sold or not;

•   whether the person acts as an agent for other persons; and

•   whether the person has authority or implied authority to conclude contracts on behalf of the other person.

In your interpretation request you specifically refer to employees and salespersons. Employees would be included as a person who is acting on behalf of the another person. Generally employees would not be considered to be independent of their employer due to the nature of their relationship with their employer as outlined in their employment contract. Under an employment contract, the employer usually has the right to instruct the employee in almost all aspects concerning the business activity.

Salespersons, may be either employees or independent contractors. Where the salesperson is an employee, the above discussion on employees would apply.

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 CCRA with respect to a particular situation.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at 952-8812.

Yours truly,

David Liston
Border Issues Unit
Excise and GST/HST Rulings Directorate