CRA discusses whether a USco can be subject to Part I tax as a result of Canadian home offices of employees
25 May 2023 - 11:20pm
Regarding whether USco (a US C-Corp and a “qualifying person” for purposes of the Canada-US Treaty) would be considered to be carrying on business in Canada by virtue only of some of its employees being Canadian residents who worked from their homes for two or three days a week and, if so, whether USco would be considered to be earning income through a permanent establishment (PE) in Canada, CRA indicated:
- Internal support activities such as those of an accountant or an HR professional providing services only to USco would generally not constitute USco carrying on business in Canada.
- However, where a Canadian resident employee worked from home as part of a team providing consulting services, the Canadian physical location of that individual might inform where the services were performed, with it also being relevant if the clients were resident in Canada.
- If such a Canadian resident employee acted in a product development role, this might engage s. 253(a), which references “creating or improving, in whole or in part, anything in Canada”.
- S. 253(b) might also be engaged, which was described as generally including “actively seeking and attempting to obtain customers in Canada, beyond ‘a mere invitation to treat’ or advertisement.”
- The employee’s home office would not constitute a “fixed place of business” through which the business of USco was partly or wholly carried on under the PE Article assuming that such office was not rented by USco or was otherwise at its disposal.
- Regarding Art. V(5), “if a contract entered into by a Canadian employee requires approval by the U.S. office to be binding, such contract would not necessarily be viewed as entered into in Canada, provided the approval by the U.S. office is not merely a formality.”
Neal Armstrong. Summaries of 17 May 2023 IFA Roundtable, Q.5 under s. 115(1)(a)(ii), s. 253(a), s. 253(b) and Treaties – Income Tax Conventions – Art. V.