30 May 2000 Internal T.I. 2000-0007187 - Reg. 400(2) - Fixed Place of Business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: In the definition of "permanent establishment" in paragraph 400(2)(a) of the Income Tax Regulations, do the words " a fixed place of business" mean a fixed place of business in Canada?

Position: No

Reasons: The definition of "permanent establishment" in subsection 400(2) of the Income Tax Regulations deals with permanent establishments both in and outside Canada. Therefore, unless it is otherwise clearly stated, the phrase "a fixed place of business" does not refer only to a fixed place of business in Canada.

		May 30, 2000

	Newfoundland and Labrador 	International Section
	   Tax Services Office	S. Leung
	International Audit Section	957-2115

	Attention: David Hayward
		2000-000718

Permanent Establishment
XXXXXXXXXX

We are writing in reply to your memorandum of February 1, 2000 in which you requested our comments on whether "the principal place in which the corporation's business is conducted" as described in paragraph 400(2)(a) of the Income Tax Regulations (the "Regulations") refers to a principal place of business in Canada in the situation outlined below.

1. XXXXXXXXXX was incorporated in XXXXXXXXXX and is a resident of that country.

2. XXXXXXXXXX.

3. XXXXXXXXXX has no fixed place of business in Canada. Its employees stayed in hotels and performed XXXXXXXXXX at the place where the equipment was located. They were in Canada performing their duties for approximately XXXXXXXXXX weeks.

4. No substantial machinery or equipment was used in the XXXXXXXXXX.

5. XXXXXXXXXX to be carrying on business through a permanent establishment in Canada. Accordingly, XXXXXXXXXX is subject to tax in Canada on its profits attributable to its deemed permanent establishment in Canada.

The representative of XXXXXXXXXX opined that XXXXXXXXXX did not have a permanent establishment in Newfoundland and is consequently not subject to Newfoundland income tax and is not entitled to the Federal abatement under subsection 124(1) of the Income Tax Act (the "Act").

It is understood that the contentious issue in this case is the interpretation of paragraph 400(2)(a) of the Regulations. That paragraph states that where a corporation does not have any fixed place of business, a permanent establishment of that corporation means the principal place in which the corporation's business is conducted. It is your opinion that the phrase "the principal place in which the corporation's business is conducted" used in that paragraph alludes to the principal place of business in Canada. As XXXXXXXXXX principal place of business in Canada during the period of time in question was in the Province of Newfoundland, it is therefore your view that XXXXXXXXXX had a permanent establishment in the Province of Newfoundland during that period of time.

Our Comments

The term "permanent establishment" is defined in subsection 400(2) of the Regulations to mean a fixed place of business including an office, a branch, a mine, an oil well, a farm, a timber-land, a factory, a workshop or a warehouse. In addition, paragraphs 400(2)(a) to (e) of the Regulations deem a corporation to have a permanent establishment in certain circumstances. It should be noted that subsection 400(2) of the Regulations only specifies what constitutes a "permanent establishment". It does not define "permanent establishment in Canada or in a particular province". From the use of the term "permanent establishment" in paragraph 400(2)(c) and throughout Part IV of the Regulations, it is clear that that term refers to a place of business in Canada as well as one outside Canada. In fact, throughout Part IV of the Regulations the reference to "permanent establishment in Canada" can only be found in paragraph 400(2)(d) of the Regulations as that phrase is necessary in order to determine whether land in a province [of Canada] would be deemed to be a permanent establishment. In other places of Part IV of the Regulations, references are usually made to "a permanent establishment in a province or country other than Canada" (e.g., subsection 402(4)). In subsection 402(4.1) of the Regulations, a reference is made to "a permanent establishment in the other country", and the phrase "a permanent establishment outside Canada" can be found in subsections 413(1) and (2) of the Regulations. Therefore, we conclude that the term "permanent establishment" as defined in subsection 400(2) of the Regulations which begins with the words "For the purposes of this Part" (i.e., the whole Part IV of the Regulations) does not only refer to a permanent establishment in Canada; it also refers to a permanent establishment outside Canada.

The above also applies to the phrase "a fixed place of business" used in subsection 400(2) of the Regulations. Consequently, a fixed place of business can be one in Canada or outside Canada. As XXXXXXXXXX had during the time in question a fixed place of business in XXXXXXXXXX, one would not have to look to paragraph 400(2)(a) of the Regulations because that paragraph is only applicable if the corporation does not have any fixed place of business anywhere.

Therefore, if XXXXXXXXXX does not have a fixed place of business in the Province of Newfoundland and if none of paragraphs 400(2)(b) to (e) of the Regulations applies, XXXXXXXXXX would not have a permanent establishment in the Province of Newfoundland and consequently would not be subject to Newfoundland income tax.

We agree with you that the Act is only concerned with taxing a non-resident on its income earned in Canada and it does not allow us to tax a non-resident on income earned outside Canada. However, it does not then follow that Part IV of the Regulations refers only to the corporation's business in Canada such that references to a fixed place of business or a principal place of business in subsection 400(2) and paragraph 400(2)(a) of the Regulations means a fixed or a principal place in Canada in which the corporation's business is conducted. As explained above, the term "permanent establishment" as defined in subsection 400(2) of the Regulations does not restrict its meaning to a permanent establishment in Canada, so is the phrase "fixed place of business" or "principal place in which the corporation's business is conducted" as used in subsection 400(2) and paragraph 400(2)(a) of the Regulations.

If you have any question regarding the above, please do not hesitate to contact us.

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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