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: In what circumstances will a shared workspace in Canada used by a U.S. resident person, carrying on business in Canada, be considered to be a permanent establishment of the U.S. resident person in Canada, assuming Articles V(5) and V(9) of the Canada-U.S. Tax Convention do not apply?
Position: Whether a shared workspace in Canada used by a non-resident results in a PE in Canada is a question of fact and would have to be made on a case-by-case basis.
Reasons: A PE analysis for a shared workspace is no different than the PE analysis for any other place.
2019 International Fiscal Association Conference
Question 2 - Shared Workspaces and Permanent Establishments
Shared workspaces are becoming more and more popular. In the following examples, will a shared workspace in Canada used by a person that is a non-resident of Canada that is resident of the U.S., carrying on business in Canada, be considered to be a permanent establishment (“PE”) of the U.S. resident person in Canada, assuming Articles V(5) and V(9) of the Canada-U.S. Tax Convention (“Treaty”) do not apply?
Example 1. A U.S. resident consultant has a Canadian membership in the workspace and works from a shared workspace in Canada from time to time, providing services and doing sales calls to Canadian clients.
Example 2. Rather than open a branch office, a U.S. resident corporation pays for a shared workspace in Canada for use by its Canadian resident employees.
Where a non-resident person is carrying on business in Canada, the non-resident is liable to Canadian income tax on the person’s taxable income earned in Canada under paragraph 2(3)(b) and subparagraph 115(1)(a)(ii) of the Income Tax Act. However, under most of Canada’s tax treaties, 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 PE situated therein. Paragraph 1 of Article V of the Treaty, for example, states that a PE means a fixed place of business through which the business of a resident of a contracting state is wholly or partly carried on.
The key factors in the PE analysis are:
- the existence of a place of business;
- the place of business must be fixed, such that a degree of permanence exists; and
- the non-resident must be carrying on the business wholly or partly through this fixed place.
As stated in Archived Income Tax Technical News # 33, the CRA believes that these three conditions form an appropriate framework for a PE analysis and any relevant factor to a PE determination has to revolve around one of these three conditions.
It has been generally agreed that there is no requirement that a fixed place of business be a place owned or rented by the non-resident and, depending on the circumstances, the mere fact that a non-resident has a certain amount of space at its disposal which is used for business activities may be sufficient to constitute a fixed place of business.
A provider of a shared workspace may offer a desk in a common area, a private office or an entire headquarters facility for a business. Some memberships in shared workspaces provide the user with mail services only, or the use of a conference room for a set number of hours.
It is possible that a shared workspace in Canada used by a non-resident may result in the non-resident having a PE in Canada, depending upon the facts and circumstances of the particular case. However, given the variety of shared workspace options available, the determination of whether the use of a shared workspace by a non-resident results in a PE in Canada is a question of fact and would have to be made on a case-by-case basis.
As such, based on the limited facts provided in the various examples, we cannot provide a definitive answer to these questions. We are prepared however, to provide the following general comments. As noted in the question, we have assumed that Articles V(5) and V(9) of the Treaty do not apply to each of these examples.
Generally, a service business is carried on where the services are provided because that is the profit-producing activity of the business. In this case, if the U.S. resident consultant has a service business, and carries on this business in Canada from the shared workspace on a regular basis, the consultant will likely be considered to have a PE in Canada.
Although the shared workspace is owned by another entity, the premises are a fixed location of the business of the U.S. resident corporation through which the business is carried on, and would be considered a PE.
May 15, 2019
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