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.
Dear Sirs:
This is further to our letter of January 27, 1983 in reply to your enquiry of December 2, 1982 and your recent conversation with Mr. R. Read concerning the meaning of the term "permanent establishment" for purposes of paragraph 3(f) of the Protocol to the present Canada-U.S. Tax Convention.
It is largely a question of fact as to whether or not a permanent establishment exists in any particular circumstances. This, of course, can only be determined when all the facts are known.
Although you have an actual situation in mind, your question has been posed on a hypothetical basis and contains very limited information. In summary, a United States company will contract to install certain equipment in Canada for a Canadian company but will use subcontractors to make the actual installation. The component parts of the equipment to be installed will be shipped from the U.S. and the subcontractors will use substantial machinery and equipment in the course of the installation. The U.S. company will assign two of its employees to the installation site to supervise the work of the subcontractors but those employees will only use office equipment and may only enter into legally enforceable contracts on behalf of the U.S. company after first obtaining approval from an officer of the company. The U.S. company has no fixed place of business in Canada.
Essential information not provided in respect of the above transaction includes, among other things:
- a) the duration of the installation project;
- b) the dollar amount of the contract;
- c) the size, quantity and type of equipment being installed and its function;
- d) the location of the installation, including any geographic or climatic conditions affecting it;
- e) the amount, type and size of machinery and equipment used by the subcontractors as well as the number of employees engaged by them on this project; and
- f) what percentage of the total work required to fulfill the U.S. company's obligations under the installation contract is represented by the supervisory and any related activities performed by its two employees at the installation site as well as their involvement, if any, in initial contract negotiations, planning and on-site revisions of the installation process. In addition, the professional qualifications of those employees and their position in the company would be relevant information.
In general, it is our view, that a construction site in Canada or an installation project site in Canada of any significant duration would constitute a permanent establishment of any person carrying on an part of its business in Canada at that site for purposes of paragraph 3(f) of the Protocol to the present Canada-U.S. Tax Convention. This would be so whether or not such person performs the actual construction or installation activity itself or engages subcontractors to do so. It is also our view, that planning and supervision carried on by a building contractor or a contractor for an installation project would constitute part of the activity allocable to that particular permanent establishment. That does not mean, however, that we would consider planning and supervision of construction work or installation work to constitute, in themselves, a construction site or installation protect site that is a permanent establishment for purposes of Protocol 3(f).
As to what constitutes "a construction site or installation project site of any significant duration" which could represent a permanent establishment in Canada of a U.S. enterprise for purposes of Protocol 3(f), it is our view that if there are no supervisors or only part-time supervision at a particular site, that site would probably not constitute such a permanent establishment. However, if long-term full tine supervision of more than a year is involved at such site, the site would constitute a permanent establishment in Canada of the U.S. enterprise.
We trust the foregoing will be of assistance. We would be pleased to give you a more definitive reply if you have an identified client with a definite course of action in mind.
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© Her Majesty the Queen in Right of Canada, 1983
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© Sa Majesté la Reine du Chef du Canada, 1983
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