Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
1) Can section 400 of the Regulations apply to a non-resident corporation that does not have a permanent establishment in Canada under the Canada-United States Convention but whose income earned in Canada may be taxed in Canada under Article XVI of the Convention?
2) Is a non-resident corporation touring in Canada considered to have a permanent establishment in each province in which performances are presented under paragraph 400(2)(e) of the Regulations?
Position:
1) Yes. 2) No.
Reasons:
(1) Since business income earned in Canada may be taxed under Article XVI of the Convention, subsection 2(3) of the Act provides that the taxable income of a non-resident corporation shall be determined in accordance with the provisions of section 115 of the Act. Subparagraph 115(1)(a)(ii) of the Act provides that taxable income earned in Canada by a non-resident corporation includes income from a business carried on by it in Canada. Subsection 124(1) of the Act provides that a corporation (resident or non-resident) may deduct from its tax an amount equal to 10% of "taxable income earned in the year in a province". This expression is defined in subsection 124(4) of the Act, which refers to subsection 400(1) of the Regulations. (2) Although in the particular situation the equipment could be considered substantial, the duration of each project was less than 30 consecutive days per province or less than 90 cumulative days across Canada. See ACÉF Conference 2008 Roundtable Question 12.2 (acetate).
March 2, 2010
Mr. Frédéric Bourgeois, CGA Headquarters
Audit Division Income Tax Rulings Directorate
Ottawa TSA
Danielle Bouffard
(613) 590-2155
2009-034695
Section 400 of the Income Tax Regulations (the "Regulations")
This is in response to your memorandum of November 4, 2009, in which you asked us various questions regarding the above subject. We have taken into account the additional information sent by e-mail on November 30, 2009.
Facts of the Particular Situation
1. A corporation was incorporated in the United States in the state of XXXXXXXXXX ("Non-Resident Corporation"). Non-Resident Corporation does not have a permanent establishment in Canada for purposes of the Canada-U.S. Tax Convention. (the "Convention").
2. Non-resident corporation represents only one person ("the Artist"). The Artist holds 50% of the shares of Non-Resident Corporation and XXXXXXXXXX holds the other 50%. The Artist is a shareholder of XXXXXXXXXX. The Artist is not a Canadian resident for the purposes of the Convention.
3. Non-Resident Corporation toured XXXXXXXXXX and across Canada in XXXXXXXXXX. This was the first time that Non-Resident Corporation organized a series of performances in Canada. Furthermore, XXXXXXXXXX.
4. During the year XXXXXXXXXX , Non-Resident Corporation presented the following XXXXXXXXXX shows in XXXXXXXXXX Canadian provinces:
XXXXXXXXXX
5. A contract has been signed between a promoter and Non-Resident Corporation specifying the responsibilities of each. In particular, the promoter rented the arenas where the performances took place. The promoter is a Canadian resident for the purposes of the Convention and is not related to the Artist or Non-Resident Corporation. The promoter had an obligation to pay a Non-Resident Corporation a fixed amount of XXXXXXXXXX per show in addition to a variable amount based on the profitability of the show (number of tickets sold, etc.). The promoter paid XXXXXXXXXX to Non-resident Corporation in XXXXXXXXXX for shows performed in Canada. A Form T4A-NR was issued to the non-resident corporation by the promoter. The payments stem directly from the Artist's performances in Canada. The income generated by Non-Resident Corporation is taxable in Canada in accordance with Article XVI(2) of the Convention.
6. For each show, Non-Resident Corporation had to install the stage, lights, sound system, etc. The stage and other equipment were installed on the day of the show. Non-Resident Corporation had XXXXXXXXXX trailer trucks available to transport the stage equipment. The tasks listed were performed by employees of Non-Resident Corporation.
Questions
1. Does section 400 of the Regulations apply to a non-resident corporation that does not have a permanent establishment in Canada under the Convention but whose income earned in Canada may be taxed in Canada under Article XVI of the Convention?
2. By virtue of paragraph 400(2)(e) of the Regulations, is Non-Resident Corporation considered to have a permanent establishment in each of the provinces in which performances were presented?
Your interpretation
You are of the opinion that section 400 of the Regulations applies to a non-resident corporation even if it does not have a permanent establishment in Canada under the Convention for the following reasons:
a. The objective of the Convention is to eliminate double taxation and thus to determine whether income earned by a corporation is taxable in Canada or the United States.
b. Income derived from concerts performed in Canada may be taxed in Canada under Article XVI of the Convention. Article XVI makes no reference to Article V, the purpose of which is to define the term "permanent establishment" used in certain Articles of the Convention. However, under Article XVI of the Convention, a non-resident company that performs concerts in Canada is not required to have a permanent establishment in Canada in order for income generated in Canada to be taxable in Canada under the Income Tax Act (the Act).
c. Where a treaty gives Canada the right to tax a source of income, then the Act must be referred to to determine how to tax that income. Reference must therefore be made to section 400 of the Regulations to determine whether the income earned is attributable to the various provinces. To do so, subsection 400(2) of the Regulations, which defines the concept of permanent establishment in a province, must be considered.
Finally, you are of the opinion that the non-resident corporation has a permanent establishment in each of the provinces where the concerts were performed. Your interpretation is supported by internal Technical Interpretation F2002-0177937, which states that the XXXXXXXXXX installation of all equipment necessary for the presentation of performances constitutes a substantial use of equipment and materials in a province.
Paragraph 5 of the Facts of the Particular Situation states that Canada is entitled to tax a non-resident corporation on income from performances in Canadian territory under paragraph 2 of Article XVI of the Convention. We agree with your interpretation that Article XVI of the Convention, which applies without regard to, inter alia, Article VII of the Convention, allows Canada to tax income derived by a non-resident company from performances in Canada without requiring that such income be earned from a permanent establishment in Canada under the Convention.
Once it is determined, as in the particular situation, that the income is subject to the provisions of the Act, subsection 2(3) of the Act provides that the taxable income of a non-resident corporation is to be determined in accordance with the provisions of sections 115 and 116 of the Act. Subparagraph 115(1)(a)(ii) of the Act provides that taxable income earned in Canada by a non-resident corporation includes income from a business carried on by it in Canada.
Where for a taxation year a corporation is taxable in Canada and has a permanent establishment in a province, the corporation may, under subsection 124(1) of the Act, be entitled to deduct from its Part I tax otherwise payable an amount equal to 10% of its "taxable income earned in the year in a province". This expression is defined in subsection 124(4) as "the amount determined under rules prescribed for that purpose ... ". Section 401 of the Regulations specifies that the amount of a corporation's taxable income earned in the year in a particular province is to be determined under the rules in Part IV of the Regulations. Subsection 400(1) of the Regulations, as it reads for taxation years before 2009, clarifies that, for the purpose of the definition "taxable income earned in the year in a province" in paragraph 124(4)(a) of the Act, that expression means " the aggregate of the taxable incomes of the corporation earned in the year in each of the provinces”. Although for taxation years before 2009, subsection 400(1) does not specifically refer to the rules in Part IV of the Regulations, in our view, that Part applies (endnote 1). In determining whether a corporation has taxable income earned in a province, the essential factor is the existence or deemed existence of a permanent establishment in a province. Therefore, the criteria in subsection 400(2) of the Regulations apply to determine whether a corporation has a permanent establishment in a province.
In addition, where a corporation is not resident in Canada, subsections (1) and (2) of section 413 of the Regulations provide specific definitions for "taxable income", "salaries and wages paid in the year" and "total gross revenue for the year". In particular, subsection 413(1) of the Regulations (endnote 2) provides that, for the purposes of Part IV, the taxable income of a corporation not resident in Canada is to be understood as taxable income earned in Canada, as determined under section 115 of the Act. In addition, subsection 413(2) of the Regulations provides that, for the purposes of paragraph 402(3)(a) of the Regulations, "total gross revenue for the year" of a corporation not resident in Canada does not include gross revenue reasonably attributable to a permanent establishment outside Canada. Consequently, for the purposes of the application of section 400 of the Regulations and section 124 of the Act, if it is established that a non-resident corporation has a permanent establishment in one or more Canadian provinces in its XXXXXXXXXX taxation year, for the purposes of the calculation under paragraph 402(3)(a) of the Regulations, the total gross revenue for the year of the non-resident corporation will only include revenues generated in the various permanent establishments in Canada.
In the preamble to subsection 400(2) of the Regulations, the term "permanent establishment" is defined as "a fixed place of business of the corporation". Although the latter term is not defined, the preamble of subsection 400(2) of the Regulations provides some examples of places that may constitute a fixed place of business for a corporation, including an office. As noted in paragraph 3 of IT-177R2, this list of examples is neither exhaustive nor absolute. Thus, places other than those listed in the preamble to subsection 400(2) of the Regulations may constitute a fixed place of business and, therefore, a permanent establishment. The CRA has indicated in 9614996 that a concert hall, arena, and related dressing rooms and offices, when available on a recurring basis, may constitute a place of business for an artist and the artist’s company.
As discussed in paragraphs 2 and 3 of IT-177R2, a fixed place of business means a place that is "used in the day-to-day business of the corporation". This interpretation is consistent with that adopted by the courts. For example, in Corporation A.A.A. S.A. v. M.N.R., 92 DTC 1794 (TCC), the Tax Court of Canada gave this expression its ordinary meaning, namely "a place frequently used by a corporation in the course of its business". Similarly, in The Queen v. William A. Dudney, 2000 DTC 6169 (F.C.A.), the Federal Court of Appeal commented as follows:
[...] an enterprise has a "permanent establishment" where it has a "fixed place of business," an identifiable location with a certain degree of permanence in which the business of the enterprise is being carried on.
It follows from the foregoing that a fixed place of business must satisfy, among other things, the criteria of stability and carrying on business established in the case law (see, inter alia, Sunbeam Corporation (Canada) Ltd. v. MNR., 62 DTC 1390 (S.C.C.)). Consequently, an arena may constitute a fixed place of business for a corporation if it satisfies, inter alia, these two criteria. While the first of these criteria is generally not an issue in the case of an arena, the second requires a review of the operations and activities of the corporation that are carried on at that location. In this regard, a certain degree of activity, regularity and recurrence of activity will be required for a business to be carried on at a specific location (see Corporation A.A.A. S.A. v. MNR, supra, and Joseph Fowler v. MNR, 90 DTC 1834 (TCC)).
Taking into account the facts of the particular situation, since in XXXXXXXXXX it was the first Canadian tour organized by the Non-Resident Corporation for the Artist and it is not expected to organize any other performances at the same venues for that Artist or others, we cannot conclude that the Non-Resident Corporation had a fixed place of business in XXXXXXXXXX for the purposes of the preamble to subsection 400(2) of the Regulations. On the other hand, paragraphs 400(2)(a) to (e.1) (proposed paragraph (e.1)) deem the circumstances in which a corporation has a permanent establishment at a particular place. Therefore, we are of the view that a non-resident corporation that does not have a permanent establishment in Canada for the purposes of the Convention or for the purposes of the preamble to subsection 400(2) of the Regulations may otherwise have a deemed permanent establishment in a province if any of paragraphs 400(2)(a) to (e.1) apply. Since, based on the facts of the particular situation, it appears to you that only paragraph 400(2)(e) of the Regulations is likely to apply in this case, our comments will be limited to that provision.
By virtue of paragraph 400(2)(e) of the Regulations, a corporation is deemed to have a permanent establishment where a corporation uses substantial machinery or equipment in a particular place at any time in a taxation year. The question, therefore, is whether or not the entertainment equipment, listed in part in paragraph 6 of the facts of the particular situation, that is used by employees of the Non-Resident Corporation in an arena located in a province is substantial enough to create a permanent establishment in that province for the Non-Resident Corporation.
As described in paragraph 6 of IT-177R2:
A corporation that uses substantial machinery or equipment in a particular place in a province will be deemed to have a permanent establishment in that province. The corporation need not own the machinery or equipment that it uses. The size, quantity and dollar value of machinery or equipment used in the particular place are some of the criteria to be considered in the determination of "substantial". … Another factor that may be taken into account in the determination is whether the said machinery or equipment contributes substantially to the generation of the gross income of the corporation earned at the particular place.
Although it is specified that the Non-Resident Corporation used XXXXXXXXXX trailer trucks (implying a substantial amount) to move "concert equipment" from one arena to another, we do not have the information necessary to determine whether this concert equipment qualifies as equipment or machinery and the size and dollar value of the equipment deployed by the Non-Resident Corporation for the performances. Assuming that the equipment qualifies as equipment or machinery and that it was used in connection with the performances organized for the Artist by the Non-Resident Corporation, it is our view that the quantity would be large enough to deem a permanent establishment in each of the provinces described in paragraph 4 of the facts of the particular situation.
However, in XXXXXXXXXX, the CRA also clarified in a round table discussion (footnote 3) that in order to deem a permanent establishment in a province or jurisdiction for the purposes of paragraph 400(2)(e) of the Regulations, generally the equipment or machinery must be used either for a period of more than 30 consecutive days per site or project or for a period of more than 90 consecutive days within a 12-month period for all projects. Since, based on the facts of the particular situation, the Non-Resident Corporation used the concert equipment in each of the provinces where performances were produced for a period of less than 30 consecutive days and throughout Canada for a period of less than 90 cumulative days, we are of the view that it is not deemed to have a permanent establishment in any of the provinces in XXXXXXXXXX for the purposes of paragraph 400(2)(e) of the Regulations.
For your information, if the taxpayer requests a copy of this letter, you may provide the taxpayer with a severed copy under the criteria of the Privacy Act that includes the taxpayer's name, which you may request from Ms. Jackie Page at (819) 994-2898. A severed copy using the Privacy Act criteria will then be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance. Should you require additional information regarding the contents of this document, please do not hesitate to contact us.
Alain Godin, Manager
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 The proposed amendment to the text of paragraph 1 of Regulation 400 applicable to the 2009 and subsequent taxation years clarifies this application.
2 For the 2009 and subsequent taxation years, paragraph 400(1.1)(a) of the Regulations will deal with taxable income earned in Canada of a corporation that is not resident in Canada.
3 ACÉF Conference 2008 -Acetate- Roundtable Question 12.2 (acetate):
What is the ARC's current position on how long the substantial machinery or equipment must be used in a province/jurisdiction in order to deem a corporation to have a permanent establishment (PE) in that province/jurisdiction? Specifically, has the ARC developed any guidelines to qualify the phrase "at any time in a taxation year" as stated in paragraph 400(2)(e) of the Regulations?
CRA Response (1 of 2)
- Generally, where a corporation uses (rented or owned) substantial machinery or equipment in a province/jurisdiction:
- after 30 continuous days, on a particular site or project; or
- after 90 days cumulative in a 12-month period;
- the corporation is deemed to have a PE in that province/jurisdiction.
CRA Response (2 of 2)
- The 30-day test applies to each contract or project. The 90-day test applies to all contracts and projects in the province/jurisdiction in a 12-month period. Each is a stand-alone test, and can both result in a deemed PE of the corporation. Where the 12-month period straddles two taxation years, the corporation will be deemed to have a PE in the province/jurisdiction in the second taxation year, after 30 continuous days or 90 days cumulative.
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