2006 Ruling 2006-0173601R3 - Permanent establishment

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: (1) Whether the activities carried on by the Foreign Bank in Canada, through a Representative Office, can be considered to have a preparatory or auxiliary character for the purposes of the XXXXXXXXXX treaty PE Article?

Position: (1)yes

Reasons: Based on the facts

XXXXXXXXXX 									2006-017360

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above taxpayer with respect to the transactions described herein. We also acknowledge the additional information provided in various subsequent letters and e-mail transmissions.

Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.

This document is based solely on the facts, proposed transactions and the purpose of the proposed transactions described below. The documentation submitted with your request does not form part of the facts, proposed transactions and the purpose of the proposed transactions and any references thereto are provided solely for the convenience of the reader.

Definitions

In this letter, unless otherwise expressly stated:

"Bank Act" is the Bank Act, S.C. 1991, c.46;

"CRA" is the Canada Revenue Agency;

"Canadian province" means XXXXXXXXXX; "Date of Authorization" is XXXXXXXXXX;

"Foreign Bank" is XXXXXXXXXX;

"Foreign Treaty Country" means XXXXXXXXXX;

"Regulations" is the Foreign Bank Representative Offices Regulation, P.C. 1992-1074 21 May, 1992; and

"Treaty" is the Convention between Canada and XXXXXXXXXX.

Facts

(1) The Foreign Bank has its head office in and is a resident of the Foreign Treaty Country for the purposes of the Treaty.

(2) Foreign Bank offers various banking services and products to its clients including corporate, commercial and investment services, private banking and asset management.

(3) On the Date of Authorization, Foreign Bank was authorized by the Office of the Superintendent of Financial Institutions (Canada) (the "Authorization") to establish and maintain a representative office (the "Representative Office") in Canada. The Authorization is not subject to any requirements, restrictions or terms other than a general compliance with the Bank Act and Regulations.

Proposed Transactions

(4) The Foreign Bank will establish and maintain a Representative Office in Canada, and:

(a) the Representative Office will be located in the Canadian province;

(b) pursuant to the Authorization, the Bank Act and its Regulations, the Representative Office is not permitted to conduct any banking activities in Canada and its activities will be restricted to (i) the general promotion in Canada of the Foreign Bank's products and services; and (ii) acting as a liaison between Canadian customers and potential ones and the Foreign Bank;

(c) in furtherance of these activities, the Representative Office will perform various functions with respect to the internal operations of the Representative Office (including renting commercial office space; listing itself in the local phone directories; opening a bank account with a Canadian financial institution to pay operating expenses; employing personnel; registering to do business in the Canadian province; acquiring a business number from the CRA and opening a payroll deductions account; connecting via the Foreign Bank's office in the Foreign Treaty Country via a shared computer network);

(d) the Representative Office has not yet begun its operations but the Foreign Bank has signed an employment agreement with a resident of Canada who will act as the chief representative of the Representative Office. The activities of the chief representative will be limited to the Representative Office's activities mentioned in paragraph 4(b) and will include specifically the following:

i. introduce, market and promote the presence of the Foreign Bank in Canada;

ii. meet with representatives of various businesses to describe the services and products offered by Foreign Bank;

iii. meet with representatives of other banks and financial institutions in order for Foreign Bank to participate in loan syndications;

iv. obtain and disseminate information between customers and Foreign Bank;

v. perform market research on the Canadian XXXXXXXXXX industry;

vi. ensure high quality and efficient service is provided by Foreign Bank to its Canadian customers by offering a closer proximity between the Canadian customers and the Foreign Bank. The services performed by the Representative Office do not include the providing of specially developed products and services for any particular customer;

vii. receive and follow-up with customer requests or concerns;

viii. hire possible assistants or independent contractors;

ix. ensure compliance with all federal and provincial laws and regulations; and

x. administer day-to-day functioning of the Representative Office.

(5) Foreign Bank will supervise regularly the operation of the Representative Office.

(6) Foreign Bank does not expect to initially employ more than a total of 3 individuals for the Representative Office.

(7) No person employed at the Representative Office shall have the authority to conclude contracts on behalf of Foreign Bank relating to its core business operations. The chief representative may from time to time exercise authority to conclude contracts on behalf of the Foreign Bank but only with respect to the internal operations of the Representative Office.

(8) The entire process of negotiating and approving all loans and the on-going supervision of such loans once advanced will be undertaken by the Corporate Lending division of the Foreign Bank from its offices in the Foreign Treaty Country. The Corporate Lending division will perform recurring verifications and monitoring of Canadian accounts and it will appoint a Foreign Treaty Country account manager for each Canadian client who will act as the primary client reference person and who while remaining in the Foreign Treaty Country, will communicate with his Canadian clients on a regular basis. All client information and files will be maintained by Foreign Bank in the Foreign Treaty Country.

(9) The chief representative of the Representative Office and each account manager assigned to a Canadian client will inform the client that all of Foreign Bank's banking activities are to be performed in the Foreign Treaty Country. The nature, purpose and limitations of the Representative Office will also be disclosed to each Canadian client.

Purpose of the Proposed Transactions

(10) The main objective of the Representative Office is to promote the Foreign Bank's services to selected Canadian industries and potential Canadian customers, to support the Foreign Bank's customers in Canada and to liaise with the Foreign Bank head office in the Foreign Treaty Country. More specifically, Foreign Bank will offer services, from its offices outside of Canada to Canadian customers focussed on traditional financings, term loans, participation in syndicated financings and mezzanine financings.

Other information

(11) To the best of your knowledge and that of Foreign Bank, none of the issues involved in this ruling request:

(i) is in an earlier return of the Foreign Bank or any related person;

(ii) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Foreign Bank or a related person;

(iii) is under objection by the Foreign Bank or a related person;

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(v) is the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions and provided the proposed transactions are completed in the manner described above, our ruling is as follows:

A. The activities of the Representative Office will be considered to be activities of a preparatory or auxiliary character for the purposes XXXXXXXXXX of the Treaty and accordingly, the Representative Office will be deemed by XXXXXXXXXX the Treaty not to constitute a permanent establishment of the Foreign Bank in Canada for the purposes of the Treaty.

Comments

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the CRA as long as the Representative Office is established by XXXXXXXXXX. Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than that specifically set out in the ruling given.

Yours truly,

XXXXXXXXXX
Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch