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 corporation has a permanent establishment in a province?
Position: Question of fact. General comments provided.
Reasons: We can only provide a determination of whether a PE exists in the context of an audit. We provided general comments to assist the taxpayer's representative in making that determination.
XXXXXXXXXX 2012-046019
T. Young
613-957-8283
February 20, 2014
Dear XXXXXXXXXX:
Re: Permanent establishment in a province
We are writing in reply to your email wherein you requested a determination of whether a corporation has a permanent establishment in the province of XXXXXXXXXX. We also acknowledge our conversation (Lindsay Frank / XXXXXXXXXX) where you were provided with information concerning permanent establishments and your conversation (Young / XXXXXXXXXX) during which you requested written confirmation of the information provided. We apologize for the delay in providing the written reply.
In your letter, you describe a situation where a XXXXXXXXXX, who resides in one province ("Province 1") provides XXXXXXXXXX services to a XXXXXXXXXX corporation that was incorporated in a second province ("Province 2"). The corporation only provides XXXXXXXXXX services at XXXXXXXXXX in Province 2. Despite our understanding that the incorporating legislation requires that the corporation maintain a head office in Province 2, the corporation lists its head office as the XXXXXXXXXX's residence in Province 1. Employees, who are members of the XXXXXXXXXX's immediate family, provide certain administrative services to the corporation at the corporation's head office in Province 1.
We are unable to provide a determination of whether the corporation has a permanent establishment in a particular province except in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. However, this technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced) are intended to assist you in making that determination.
Our comments
Where a corporation carries on business through a permanent establishment in more than one province or territory, it must allocate its income among each of those provinces and the territories. Subsection 400(2) of the Income Tax Regulations (the "Regulations") contains the definition of "permanent establishment" for the purpose of this allocation. For a detailed discussion of permanent establishments in a province, please see interpretation bulletin IT-177R2(Consolidated) Permanent Establishment of a Corporation in a Province which can be found on the CRA website.
As noted in paragraph 3 of the interpretation bulletin, if a corporation has a fixed place of business in a province, it has a permanent establishment according to the Regulations. A fixed place of business may include a place, plant or natural resource used in the day-to-day business of the corporation. It does not mean that the place of business must exist for a long time or be located in a durable building; for instance, a temporary field office on a construction site could be a fixed place of business.
In particular, you may wish to consider the following statements in the interpretation bulletin that may be relevant in determining whether the corporation has permanent establishments in the two provinces:
* An establishment in a province is not a "permanent establishment" as contemplated in the Regulations unless a business is connected with it (paragraph 2).
* Where a corporation does not have any fixed place of business (in or outside Canada), it will have a permanent establishment in the principal place in which the corporation's business is conducted (paragraph 3).
Our technical interpretation letter 2011-0395331I7 contains a detailed discussion of permanent establishments in a province. We have enclosed a copy of this letter for your convenience. In particular, the following paragraph of that letter may be useful:
The expression "fixed place of business" is not defined in the Act or Regulations, but a number of examples are listed in Regulation 400(2). Interpretation Bulletin IT-177R2 (CONSOLID), Permanent Establishment of a Corporation in a Province, explains that a fixed place of business may also include a place, plant or natural resource used in the day-to-day business of the corporation. In the FCA case The Queen v Dudney [2000] 2 CTC 56, a "fixed place of business" for the purpose of Article XIV of the Canada-U.S. Income Tax Convention was described as an identifiable location with a certain degree of permanence in which the business of the enterprise is being carried on. Accordingly, such regularity and permanence would suggest that a fixed place of business is stable and not of a temporary or tentative nature. The scope of activities, regularity and length of time during which a premises is used are all significant factors in determining whether there is a fixed place of business; however, it has been our longstanding view that the activities carried on by the employees must also be such that it would be essential that the corporation has a contractual or implied right to the use of space at each customer location in order for it to carry out those activities (see 9638900). This concept was recently addressed in Knights of Columbus v The Queen [2009] 1 CTC 2163 and American Income Life Insurance Company v The Queen [2009] 2 CTC 2114. The court determined in both cases that in order to have a fixed place of business, the corporation must also have the power or right of disposal over that fixed place. One of the key factors to support the right of disposal includes the carrying on of the business of the corporation through the fixed place.
We regret we cannot provide you with a definitive answer. However, we hope that this information is helpful to you.
Yours truly,
Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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