27 January 2011 External T.I. 2010-0384901E5 - Article V, Paragraph 6(a) Canada-US Tax Convention

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: Is a third party storage facility, where inventory of a U.S. resident is stored, and from where Canadian orders are shipped, deemed not to be a permanent establishment pursuant to the paragraph 6(a) of Article V of the Canada - US Tax Convention

Position: Yes

Reasons: Such a facility is deemed by paragraph 6(a) of Article V of the Canada - US Tax Convention not to constitute a permanent establishment if it is used solely for the purpose of storage, display, or delivery of goods belonging to the U.S. resident.

XXXXXXXXXX
									2010-038490
									Paul Oatway

January 27, 2011

Dear XXXXXXXXXX :

RE: Permanent Establishment pursuant to Paragraph 6(a) of Article V of the Canada-US Convention with Respect to Taxes on Income and Capital

I am writing in response to your email dated October 26, 2010 concerning the issue of whether the use of a third party storage facility in Canada by a U.S. resident company, for the purposes of storing merchandise for delivery to Canadian customers, would be a permanent establishment in Canada pursuant to the Canada-US Convention in Respect of Tax on Income and Capital (Canada-US Tax Convention).

Article VII of the Canada-US Tax Convention states that the business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment situated therein. Article V of the Canada-US Tax Convention provides the framework for the determination of whether a resident of a Contracting State has a permanent establishment in the other Contracting State.

Generally speaking, Article V provides the conditions that if met, will cause a place of business in the Other Contracting State to constitute a permanent establishment, or in some cases deem the resident of a Contracting State to have a permanent establishment in the Other Contracting State. Paragraph 1 of Article V contains the general definition of a permanent establishment. An actual determination of the existence of a permanent establishment in Canada pursuant to Paragraph 1 is always a question of fact, and would only be made after a thorough review of all the relevant facts.

Paragraph 6 however, provides a list of specific business activities which are treated as exceptions to the general definition of permanent establishment found in paragraph 1 and also to the more specific conditions found in paragraphs 2, 5 and 9. Paragraph 6 provides that the term "permanent establishment" shall be deemed not to include a fixed place of business engaged solely in the specific activities listed in paragraphs (a) through (e). The common feature of these specific activities is that they are generally preparatory or auxiliary in nature.

Specifically, paragraph 6(a) relates to situations where an enterprise of a Contracting State, acquires the use of facilities in the Other Contracting State, solely for the storage, display or delivery of its own goods or merchandise. Where these conditions are met, the storage facility shall be deemed not to be a permanent establishment notwithstanding that these specific business activities are carried on through a fixed place of business.

Additionally, paragraph 6(b) provides that the maintenance of a stock of goods or merchandise in the Other Contracting State, belonging to an enterprise of a Contracting State, for the purpose of storage, display or delivery shall be deemed not to be a permanent establishment in the Other Contracting State. Therefore, inventory, maintained in Canada by a US resident, shall in and of itself not be considered to constitute a permanent establishment in Canada if it is maintained solely for the purpose of storage, display or delivery.

The exceptions provided by paragraphs 6(a) and (b) are only maintained for as long as the facility is used solely for the purpose of storage, display and delivery of its own goods or merchandise or the stock of goods or merchandise is maintained in Canada solely for the purpose of storage display or delivery. Should the business activities conducted at the facility by the enterprise, expand to included business activities other than those described in paragraph 6, the exception provided by paragraph 6 would no longer be applicable, and the enterprise would be found to have a permanent establishment in the Other Contracting State. As an example, assume an enterprise of a Contracting State maintains a stock of spare parts in a facility in the Other Contracting State for delivery to customers for machinery in that Other State. Should that enterprise begin repairing or maintaining the machinery, a permanent establishment would be constituted as these activities are beyond the pure storage, display and delivery activities as contemplated by paragraph 6(a) and (b).

It is a question of fact whether an enterprise has a permanent establishment. You have indicated that the enterprise will be maintaining a stock of goods in Canada, in a third-party storage facility, for the sole purpose of storage and delivery of those goods to Canadian customers. The storage facility will receive electronic instructions from the non-resident home office to fill and deliver merchandise to Canadian customers. The storage facility does not habitually exercise an authority to conclude contracts on behalf of the non-resident enterprise in Canada. A contract in place between the enterprise and the storage facility entitles the storage facility to compensation based on the number of orders filled. You have also indicated that the storage facility is not leased, and that the enterprise has no Canadian employees, branches, stores, etc... In our view, therefore, it would appear that the enterprise is deemed not to have a permanent establishment in Canada pursuant to paragraph 6(a) and (b) of Article V of the Canada - US Tax Convention.

We trust these comments will be of assistance.

Yours truly,

Guy Goulet CA, M.Fisc.
A/Manager
For Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch