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.
Principal Issues: Whether a permanent establishment would not exist in Canada because of the Canada-U.S. Convention, Article V, paragraph 7?
Position: No position taken.
Reasons: The determination would be made only after a thorough review of all of the relevant facts and agreements.
XXXXXXXXXX Gilles Gosselin
2004-007035
September 9, 2004
Dear XXXXXXXXXX:
Re: Permanent Establishment in Canada
We are writing in response to your letter dated March 31, 2004. In the circumstances described below, you have asked whether a permanent establishment would not exist in Canada because of the Canada-U.S. Tax Convention (the "Convention"), Article V, paragraph 7.
The circumstances described in your letter appear to relate to a factual situation, involving specific taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments, which may be of assistance.
The circumstances that you have described are that a U.S. "S" Corporation ("Usco") intends to sell goods to a customer(s) resident in Canada. The goods will be shipped to a warehouse in Canada owned by an arm's length corporation resident in Canada ("Canco") that will store Usco's goods until they are shipped to Usco's Canadian customer(s). Usco will pay Canco a "sales commission" for the use of its warehouse facilities. Canco will also attempt to find new customers for Usco. Canco will negotiate selling prices with the prospective new customers. The prices will be based on a price list and terms established in advance by Usco. Canco will invoice Usco's Canadian customer(s) on behalf of Usco. The invoices will reflect Usco's name but Canco's address. Canco's name will not appear on the invoices. Canco will collect receivables on behalf of Usco. Collections will be deposited into a bank account of Usco maintained in Canada. Canco will not have signing authority on such account. Usco will pay Canco for these services. Canco performs the same or similar services for many other arm's length customers.
In our view, Usco will be carrying on business in Canada pursuant to paragraph 253(b) of the Income Tax Act (Canada)(the "Act") because Usco is soliciting orders and offering its goods for sale in Canada through Canco. However, since Usco is a resident of the United States for purposes of the Convention, Canada would maintain its right to tax Usco's business income in Canada only if Usco carried on the business through a permanent establishment in Canada (Convention, Articles IV and VII).
Generally, a permanent establishment is a fixed place of business through which the business of Usco is wholly or partly carried on, which includes, among other things, a place of management, a branch, or an office, but does not include a place which Usco uses solely for certain auxiliary or preparatory activities, such as a place of inventory or storage (Convention, Article V, paragraph 1, 2 and 6). If Usco does not have such a fixed place of business in Canada, Usco may be deemed to have a permanent establishment in Canada if Canco is a dependent agent because it appears to have, and would habitually exercise in Canada, effectively, an authority to conclude contracts in Canada in the name of Usco (Convention, Article V, paragraph 5). However, Usco may be deemed to not have a permanent establishment in Canada merely because Usco carries on business in Canada through Canco if Canco is an "independent agent acting in the ordinary course of its business" (Convention, Article V, paragraph 7).
Whether Usco has a "fixed place of business" in Canada, or whether Canco is an "independent agent" or an "independent agent acting in the ordinary course of its business", is a determination that we would make only after a thorough review of all of the relevant facts and agreements, such as those between Usco and Canco, and between Usco and its customer(s) in Canada, and Canco and Usco's customers in Canada, if any. However, generally, in response to your direct question about Article V, paragraph 7, in order for Canco to be an independent agent acting in the ordinary course of its business, Canco must be independent both legally and economically and acting in the ordinary course of its business when acting on behalf of Usco. The information that you provided is insufficient to enable us to determine these issues. For example, one of the key issues the CRA would focus on in making this determination is the independent agents' ordinary course of business. In this regard, we would need you to expand on your statement that "Canco performs the same or other services for many other arm's length customers." For your assistance we refer you to the OECD Model Tax Convention, Commentary on Article 5, paragraphs 5 and 6, which discuss thoroughly the concept of "independent agent" and "independent agent acting in the ordinary course of its business".
We trust that our comments will be of assistance to you. If you have any questions or comments please feel free to contact the writer, Gilles Gosselin, at (613) 946-3553.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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