23 November 2023 Internal T.I. 2020-0850381I7 - Article V(4) of the Canada-U.S. Treaty

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: 1) Whether the term "three months" contained in Article V(4) of the Canada-U.S. Treaty refers to a consecutive period. 2) Whether “three months” means three calendar months or days totaling an equivalent of three months. 3) Whether the word “use” contained in Article V(4) of the Canada-U.S. Treaty includes standby time and preparation time.

Position: 1) No, the three-month testing period is not required to be consecutive. 2) For the purposes of Article V(4) of the Canada-U.S. Treaty, the testing period of "three months" generally means the aggregation of the number of days in three months. 3) Preparation time is generally not counted towards the testing period while standby time is generally counted.

Reasons: 1) Based on a textual, contextual, and purposive approach to the statutory interpretation of Article V(4) of the Canada-U.S. Treaty. 2) The term “three months” in this context refers to the aggregate time measured by the number of months. 3) Based on the ordinary meaning of the word "use", practical considerations, and industry practice.

XXXXXXXXXX							HEADQUARTERS
Senior Appeals Officer						Income Tax Rulings
International Tax and Tax Avoidance Section			Directorate
Tax and Charities Appeals Directorate 				Vicky Liu
Appeals Branch		

								2020-085038

Subject: Article V(4) of the Canada-U.S. Income Tax Convention

We are writing in response to your email dated May 15, 2020, requesting our views on the interpretation of the phrase “such use is for more than three months in any twelve-month period” contained in Article V(4) of the Canada-U.S. Income Tax Convention (the “Canada-U.S. Treaty”). In particular, you requested our views as to whether the term “three months” refers to a consecutive period, whether “three months” means three calendar months or days totaling an equivalent of three months, and whether the word “use” includes standby time and preparation time. We apologize for the delay in our response.

Our Comments

1) Whether the testing period of three months refers to a consecutive period

Article V(4) of the Canada-U.S. Treaty provides that a permanent establishment exists in a Contracting State if the use of an installation or drilling rig or ship in that State to explore for or exploit natural resources is for more than three months in any twelve-month period.

In our view, the three-month testing period could be non-consecutive, such that each use of an installation or drilling rig or ship would be aggregated in determining whether the three-month threshold is exceeded.

2) Whether “three months” means three calendar months or days totaling an equivalent of three months

The word “month” is not defined in the Canada-U.S. Treaty or the Income Tax Act, therefore, pursuant of Article III(2) of the Canada-U.S. Treaty, the meaning of the undefined term should be determined under Canadian domestic tax law. Pursuant to subsection 35(1) of the Interpretation Act, a month means a calendar month.

The calculation of a calendar month was discussed in Smith v. The Queen, 96 DTC 3246 (T.C.C.) (“Smith”) and in McCombie v. The Queen, 2000 DTC 3636 (T.C.C.) (“McCombie”). In both cases, the court was asked to determine whether the appellant resided throughout a period of not less than 6 consecutive months in a prescribed northern zone thereby entitling the appellant to a deduction under subsection 110.7(1) of the Income Tax Act. As concluded in Smith, a calendar month means a period calculated from a day in a month to the day numerically corresponding to that day in a following month less one, and as concluded in McCombie, a portion of a month cannot constitute a calendar month.

However, the testing periods involved in both Smith and McCombie relate only to a consecutive period of months, thus the calculation of a month addressed therein might not apply to Article V(4) of the Canada-US Treaty, where an aggregate number of months is involved. We are not aware of any relevant Canadian court cases that discussed the calculation of a month in a situation where an aggregate number of months is involved.

Subsection 3(1) of the Interpretation Act provides that the Interpretation Act only applies where the statute in issue does not suggest a contrary interpretation. Subsection 35(1) of the Interpretation Act is not applicable in the present case as it is our view that it is not the intention of the legislation to disregard any partial month activities.

Considering that the testing period of three months is not required to be consecutive, the term “three months” should be considered to refer to the aggregate time measured by the number of months. Accordingly, in our opinion, for the purposes of Article V(4) of the Canada-U.S. Treaty, “three months” generally means the aggregation of the number of days in three months.

3) Whether the word “use” includes standby time and preparation time

You also raised a question with respect to the interpretation of the word “use”, as to whether it includes standby time and preparation time.

In order to constitute “use”, within in the meaning of Article V(4) of the Canada-U.S. Treaty, we are of the view that the installation or drilling rig or ship in question must have been utilized to explore for or exploit natural resources.

During preparation time, the installation or drilling rig or ship in question is in the process of getting ready to operate and is not yet capable of being utilized to explore for or exploit natural resources. Thus, preparation time generally would not be counted towards the three month testing period.

Nevertheless, with respect to standby time, we are of the view that it would generally be included in the testing period. Although the object is not in operation at the moment when it is on standby, it is in a condition or state of readiness and available for immediate deployment.

The standby period is generally a temporary pause from operation that could be caused, for example, by severe weather, or shortage of labour. Such temporary interruption should not change the status that the installation or drilling rig or ship in question is being utilized in the business. This seems to us to be a logical interpretation that is supported by practical considerations and industry practice.

In summary, we are of the view that, for the purposes of Article V(4) of the Canada-U.S. Treaty, preparation time is generally not counted towards the three month testing period while standby time is generally counted.

We trust our comments will be of assistance.

Yours truly,

Angelina Argento
Manager
for Division Director
International Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch