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 U.S. LLC will be considered to be carrying on business in Canada through a permanent establishment in Canada as a result of the emigration to Canada of a member of that U.S. LLC and the subsequent provision of services after emigration by that member to the U.S. LLC as an employee of an unrelated Canadian resident service provider?
Position: No, in the circumstances.
Reasons: Determination as to whether a non-resident entity has a permanent establishment in Canada is a question of fact; however, based on the facts, as submitted, we are of the view that the emigration of the formerly US-resident member of the U.S. LLC to Canada and the subsequent provision of services to U.S. LLC by the individual as an employee of an arm`s length Canadian resident service provider will not cause the U.S. LLC in question to be considered to be carrying on business in Canada through a permanent establishment.
Re: Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the additional information provided to us in your emails and telephone conversations, the last of which was on XXXXXXXXXX.
We understand that, to the best of your knowledge and that of the taxpayer, none of the transactions or issues involved in this advance income tax ruling request are the same as or substantially similar to transactions and/or issues that are:
(i) in a previously filed tax return of the taxpayer or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) the subject of a current or completed court process involving the taxpayer or a related person; or
(v) the subject of a ruling request previously considered by the Income Tax Rulings Directorate.
This document is based solely on the Facts, Proposed Transactions, and Purpose of the Proposed Transactions described below. Any documentation submitted in respect of your request that does not form part of the Facts and Proposed Transactions, and any references thereto are provided solely for the convenience of the reader.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended (the “Act”).
Our understanding of the Facts, Proposed Transactions, and Purpose of the Proposed Transactions is as follows:
The following definitions apply in respect of this advance income tax ruling. Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require:
(a) “Can Worker” means XXXXXXXXXX, the individual described in paragraph 13;
(b) “Canco” means XXXXXXXXXX, a corporation formed in XXXXXXXXXX and resident in Canada. Canco is a subsidiary of the XXXXXXXXXX, a workforce consultancy company formed and resident in the United States (the “U.S.”);
(c) “Emigration” means Can Worker’s relocation to XXXXXXXXXX, from the U.S. as further described in paragraph 27;
(d) “Employment Agreement” means the agreement entered into between Can Worker and Canco as described in paragraph 28.
(e) “ForCo” means XXXXXXXXXX, a limited liability company formed in XXXXXXXXXX under the XXXXXXXXXX;
(f) “Fund” means XXXXXXXXXX offered by ForCo;
(g) “XXXXXXXXXX” means the XXXXXXXXXX committee of ForCo;
(h) “Proposed Transactions” means the transactions described in paragraphs 27 to 39 below, which were proposed at the time of the request for an advance income tax ruling;
(i) “RC” means the investment process review committee of ForCo;
(j) “ServiceCo” means XXXXXXXXXX, a limited company incorporated and resident in XXXXXXXXXX. ServiceCo is a global workforce consultancy company;
(k) “Service Fee” means the monthly fee paid by ForCo to ServiceCo for the services provided by ServiceCo in respect of Can Worker and the services provided to ForCo through Can Worker;
(l) “Services Agreement” means the agreement entered into by and between ForCo and ServiceCo on XXXXXXXXXX, which establishes the global employer organization services to be provided to ForCo by ServiceCo in respect of Can Worker and certain services provided to ForCo through Can Worker; and
(m) “Treaty” means the Canada-U.S. Tax Convention (1980), as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.
Our understanding of the Facts, the Proposed Transactions, and the Purpose of the Proposed Transactions is as follows:
1. ForCo is treated as a disregarded entity for U.S. income tax purposes and a corporation for Canadian income tax purposes.
2. As of XXXXXXXXXX, ForCo had XXXXXXXXXX members and approximately XXXXXXXXXX employees who were all physically located in the U.S. It has no directors, employees or officers that are resident in Canada. Prior to the Emigration, it had no members who were resident in Canada.
3. ForCo has one office located at XXXXXXXXXX; it has no offices situated in Canada or any premises otherwise available to it in Canada.
6. To the best of ForCo’s knowledge, no clients of ForCo are resident in Canada or carry on business in Canada through a permanent establishment. The clients of ForCo are primarily resident in the U.S. for income tax purposes.
7. ForCo’s revenues are generated as a percentage of the market value of assets under management and occasionally also performance-based fees when a product outperforms client-specific thresholds.
8. All of ForCo’s business is managed under the direction of the XXXXXXXXXX, comprised of XXXXXXXXXX members, and all other committees of ForCo report to and are guided by the XXXXXXXXXX.
9. The XXXXXXXXXX is responsible for ForCo’s strategic plan and for entering and performing contracts of the business.
10. The RC, comprised of senior members of ForCo, some of whom are also on the XXXXXXXXXX, oversees and monitors all investment teams, including the Fund team.
11. There is an annual meeting of all ForCo members held in XXXXXXXXXX during which ForCo business matters are attended to, such as the approval of the financial budget and the admittance of any new members. These matters require a majority vote of the members. Can Worker is not part of a group of related persons that constitutes a majority of the members of ForCo.
12. No members or employees of ForCo travel to Canada as part of the business of ForCo.
13. Can Worker is a member of ForCo with XXXXXXXXXX% ownership of ForCo. Can Worker is a U.S. citizen and, prior to Emigration, had always been a resident of the U.S.
14. Prior to Emigration, Can Worker acted as a portfolio manager on the Fund team as a member of ForCo. Can Worker was not a member of either the XXXXXXXXXX or RC. The Fund team, including Can Worker, consisted of XXXXXXXXXX members and XXXXXXXXXX employee. Can Worker reported to the director of the Fund, who oversaw the management of the Fund team. The director of the Fund team is a member of ForCo and represents the Fund team on the XXXXXXXXXX.
15. Can Worker’s primary duties on the Fund team included the following activities:
a) portfolio management;
b) investment analysis of specific industries;
c) investment recommendations including proposing the purchase and sales of securities in a portfolio;
d) report to the director of the Fund in XXXXXXXXXX; and
e) marketing activities to clients and prospective clients outside of Canada.
16. Each Fund team member focuses their research and investment expertise on specific industries. Any Fund team member may recommend purchase and sell decisions for securities in the portfolio. The recommendation is then reviewed by the Fund team to determine whether it is compatible with the Fund’s investment objective. The portfolio managers will generally reach a decision to buy or sell a security. However, the Fund director ultimately decides whether to buy or sell a given security. After an investment decision is made, ForCo’s traders, situated in XXXXXXXXXX, execute the purchase and sell orders.
17. The Fund team’s strategy emphasizes investments in small companies with attractive prospects for growth in earnings and cash flow. It anticipates only investing in companies whose stock is publicly traded on U.S. markets.
18. As of XXXXXXXXXX, the Fund team was generating minimal revenue and losing money in aggregate. The Fund product is a growth investment for ForCo.
19. The clients of the Fund team are exclusively in the U.S. and the Fund team’s revenue is entirely U.S. sourced.
20. Accounts of new clients won by the Fund team are opened and administered by a group of portfolio administrators at ForCo’s head office.
21. In contemplation of the Emigration, on XXXXXXXXXX, ForCo and ServiceCo entered into the Services Agreement in order to simplify tax and payroll compliance in Canada in respect of Can Worker as a result of the Emigration.
22. Pursuant to the Services Agreement, ServiceCo provides certain global employer organization services to ForCo including, amongst others, payroll, immigration, and administrative services for individuals designated by ForCo. ServiceCo also provides certain services to ForCo through a designated individual, as outlined in a letter of assignment between ServiceCo and ForCo, contained in an addendum to the Services Agreement. The designated individual is Can Worker in both cases.
23. Pursuant to the Services Agreement, Can Worker will be under the guidance of ForCo with regard to work performed. In addition, ForCo will supervise and control the work, processes and deliverables performed by Can Worker and will review and approve the corresponding work product.
24. ForCo will pay the Service Fee to ServiceCo. The Service Fee will be calculated monthly and will be comprised of labour cost, other fees and a management fee. The labour cost will include the base salary, statutory benefits (employer’s component of social costs where applicable), and other benefits/amounts agreed by both parties with respect to Can Worker, together with any and all taxes, insurance, statutory, governmental and regulatory contributions in relation thereto. For the purpose of calculating the labour cost, by the third day of each month, ForCo shall advise ServiceCo or its delegate of the base salary, and other salary amounts to be included in the labour cost for that month. Other fees will include any other fees as mutually agreed, in writing, by the parties. The management fee will be the fee ForCo pays to ServiceCo calculated, in respect of each month, as a fixed monthly fee. The monthly management fee applicable to Can Worker is specified in the Services Agreement and is US$XXXXXXXXXX.
25. Subsequent to the Services Agreement and before the Emigration, ServiceCo engaged Canco, as a subcontractor, to fulfil its obligations to ForCo under the Services Agreement.
26. ForCo, ServiceCo and Canco are not related to each other and are all at arm’s length with each other.
27. The Emigration occurred on XXXXXXXXXX, for personal reasons.
28. Can Worker and Canco entered into the Employment Agreement on XXXXXXXXXX. The Employment Agreement is subject to a 3-month probation period, termination clauses, vacation and leave requests. Can Worker may resign with two weeks written notice. Salary is to be paid semi-monthly and no overtime will be paid. Can Worker must notify Canco of any days in which he is regularly scheduled to work, but no work is performed such as sick days, personal time off days or unpaid leaves of absence.
29. Post Emigration, pursuant to the subcontractor agreement between ServiceCo and Canco described in paragraph 25 and the Services Agreement, Can Worker, as an employee of Canco, continues to perform the same activities in respect of ForCo, as described in paragraph 15, from a home office located in XXXXXXXXXX. The income derived by ForCo from the services provided in Canada by Can Worker in any twelve-month period will XXXXXXXXXX% of the gross active business revenues of ForCo for the period. None of the services provided in Canada by Can Worker are with respect to any customer of ForCo that is a resident of Canada or that maintains a permanent establishment in Canada for which Can Worker’s services are provided.
30. Can Worker remains a member of ForCo with XXXXXXXXXX% ownership of ForCo after Emigration.
31. Canco pays Can Worker directly and undertakes all required tax withholdings/reporting in Canada.
32. Can Worker has no authority to conclude contracts on behalf of ForCo.
33. Can Worker’s home office is neither associated nor identified with the business of ForCo in any manner. Moreover, ForCo does not have access to, or control over, the home office at any time.
34. Can Worker’s business cards and contact information use ForCo’s address and a XXXXXXXXXX based cell phone number.
35. ForCo assumes no costs or risks associated with Can Worker’s home office. Can Worker bears costs related to the home office including home internet, travel to ForCo’s office and attendance at annual member meetings. ForCo will only reimburse Can Worker for travel costs pertaining to any meetings by Can Worker with clients and prospective clients in the U.S.
36. Can Worker uses a computer owned by ForCo and connects to ForCo’s network in XXXXXXXXXX through XXXXXXXXXX. ForCo does not have a server in Canada.
37. Canco’s offices or any other of its physical space are not associated or identified with the business of ForCo in any manner and ForCo does not have access to, or control over, Canco’s offices or any other of its physical space at any time.
38. Can Worker is paid a base salary and performance bonus by Canco, his employer in Canada.
39. Can Worker continues to share in the profits of ForCo based on his ownership therein.
Purpose of the Proposed Transactions
40. Can Worker relocated to Canada for personal reasons, but wished to continue his role with ForCo.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, and the Purpose of the Proposed Transactions, and provided that there are no other Proposed Transactions that may be relevant to the ruling given, we rule as follows:
ForCo will not be considered to be carrying on business through a permanent establishment, as defined in Article V of the Treaty, situated in Canada, solely as a consequence of the activities of Can Worker performed in Canada as described in the Proposed Transactions.
The above Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016.
The above Ruling is binding on the Canada Revenue Agency only in respect of ForCo XXXXXXXXXX.
Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the Ruling given above and in particular, without limiting the generality of the foregoing, in respect of:
a) any issues concerning the residency of ForCo, ServiceCo or Canco and their eligibility for the benefits of the Treaty or any other relevant income tax conventionany issues concerning whether ServiceCo carries on business in Canada or has a permanent establishment in Canada;
b) any issues concerning whether ForCo carries on business in Canada or has a permanent establishment in Canada for reasons other than the activities of Can Worker performed in Canada as described in the Proposed Transactions;
c) any issues concerning Canadian income tax with respect to Can Worker including the residency of Can Worker;
d) any issues concerning withholding requirements pursuant to subsection 153(1) of the Act and section 102 of the Income Tax Regulations related to the remuneration of Can Worker; and
e) any tax compliance matters or withholding requirements pursuant to subsection 153(1) of the Act and section 105 of the Income Tax Regulations related to the activities of ForCo, ServiceCo, or Canco including those in connection with the Proposed Transactions.
An invoice for our fee will follow under separate cover.
for Division Director
Income Tax Rulings Directorate
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