16 May 1991 Internal T.I. 9012347 F - Determination of a Permanent Establishment

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.

7-901234

Determination of a Permanent Establishment 24(1)

This is reply to your memorandum of February 9, 1989 requesting our views on whether 24(1)   has a permanent establishment ("P.E.") in Canada within the meaning of that term in Article V of the 1980 Canada - U.S. Income Tax Convention (the "1980 Convention") 24(1)

Our understanding of the facts in the situation is as follows:

24(1)

24(1)

INCLUDED FOR CONTINUITY PURPOSES AND NOT INCLUDED IN COSTING

24(1)

INCLUDED FOR CONTINUITY PURPOSES AND NOT INCLUDED IN COSTING

24(1)

15.     Principles of Treaty Interpretation.

24(1) argues that a provision of a tax treaty or convention should be given a liberal interpretation in favour of a taxpayer whenever there is uncertainty as to the meaning of the provision in order to avoid double taxation.  The basis of this argument is the decision of the courts including Saunders v. M.N.R. 54 DTC 5524, Gladden v. The Queen 85 DTC 5188 and Hunter Douglas Ltd. v. The Queen 79 DTC 5340.

16.     Fixed Place of Business

24(1)

In support of these arguments 24(1)   refers to the Supreme Court Decision in Sunbeam Corporation (Canada) Ltd. v. M.N.R. 62 DTC 1390 and Revenue Ruling 77-45 issued by the IRS.

17.     Activity of an Auxiliary Character

24(1)

Our Comments

18.     In our view, a non-resident corporation is carrying on business at the location where its employees render services.

24(1)

19.

20.     Since the 1977 OECD Model serves as a standard for the uniform application and interpretation of income tax conventions and since Article V of the 1980 Convention is patterned after the Model, it is our view that the commentary in the Model is relevant in determining the meaning of "place of business".  In particular, paragraph 4 of the Commentary under Article 5 of the OECD Model reads:

"The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose.  A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal.  It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise." (emphasis added)

In our opinion,

24(1)

21.     As further support for this position, there are two recent Norwegian tax judgements which dealt with situations similar to   24(1) case.  The first Norwegian case, Johansson and Scanwell v. Stavanger Municipality, concerns a Swedish taxpayer operating a consulting company that was hired in connection with the hook-up of a drilling platform on the Norwegian continental shelf.  The Swedish company had only one employee who was provided with some space aboard the platform in order to do some paperwork.  This space was not at his exclusive use as it was simply a room containing 25 desks and was used by several others.  Both the plaintiff and the defendant agreed that the commentaries to Article 5 of the OECD Model should prevail, in spite of the fact that the tax convention between Norway and Sweden was negotiated prior to the 1977 OECD Model Convention.  The court found that the entire business activity of the consultant company was performed by its employee aboard the platform and that the company did not perform any activities elsewhere.  The court concluded that the Swedish company through the use of that space had a P.E. in Norway.

22.     The second Norwegian case, Creole Production Services Inc. v. Stavanger Municipality, deals with an American company (Creole) which provided data analysis services to another company (Phillips) which operated a drilling platform off the continental shelf of Norway.  The data was collected on the platform and then communicated to Houston where it was analyzed.  An office was provided aboard the platform for Creole's employee(s) use.  The applicable Norway-USA convention dated back to 1971.  The court concluded that, based on the commentary to the 1977 OECD Model, the office had to be considered as a fixed place of business.  The court justified the application of the 1977 OECD Model by stating that the Norway-USA convention is essentially the same as the 1963 OECD Draft Convention and the 1977 OECD Model.  The court considered that both the collection of data and its analysis were essential business activities of the company.  Since Creole was performing business activities through a fixed place on the platform located on the Norwegian continental shelf, it was concluded that Creole should be considered as having a P.E. in Norway.  The court said that it was obligated to regard the commentary to the 1977 OECD Model as an essential source for interpretation principles.  In fact, the court seems to advance the idea that conventions, which are negotiated after the 1963 OECD Draft Convention and which use a similar concept for a P.E., could adopt the interpretation in the 1977 OECD commentary in the absence of an interpretation to the contrary.  As a result of these decisions, it seems clear that with respect to conventions negotiated after the 1977 OECD Model, the courts will surely look to the commentary in the Model for interpretation guidelines.

23.     In summary of the two Norwegian cases, it should be noted that the court had to deal with the following issues before determining the existence of a P.E. and fixed place of business.

(a)     With respect to service contracts, are non-resident employers carrying on business at the place where their employees perform services.

(b)     Whether the services rendered in a particular place formed an essential part of the business activities of the non-resident corporations where all of the services performed under the contract were not carried on in the same country.

(c)     There was no designated space available all of the time for the employees to render their services.

(d)     None of the employees working in A particular place had the authority to enter into contracts on behalf of their non-resident employers.

(e)     Whether the commentary in the 1977 OECD Model can be used in the interpretation of conventions.

24.     In our view 24(1) In the Sunbeam situation, the nature of its business activity was sales and the mere writing up of sales orders by sales representatives at the premises of different customers from time to time.  The sales representatives were under no contractual obligation (implicit or otherwise) to use their homes for minimal office work and storage of goods. The court concluded that Sunbeam did not have a fixed place of business at the homes of the salesmen.

24(1)

Furthermore, the decision in the Sunbeam  case involved an interpretation of the Income Tax Regulations for the years 1952 to 1954.  It did not deal with the legislation in the 1942 U.S. Convention, the 1980 Convention or the 1977 OECD Model.  Thus, for the purposes of interpreting the meaning of P.E. under the 1980 Convention, it is our view that the commentary in the 1977 OECD Model is a good basis for distinguishing 24(1) case from the Sunbeam case.

25.     The Revenue Ruling 77-45 issued by the IRS dealt with a situation where a Canadian corporation performed services in the U.S. which were considered to be of an auxiliary nature to the principal contract services performed in Canada.  It was decided that this did not constitute a P.E. for purposes of the 1942 Convention.

24(1) 21(1)(b)

26.     A legal opinion dated December 3, 1990 written by Francois Vincent of the Department of Justice deals with a similar situation involving 24(1) That opinion, a copy of which was sent to your Division, supports the views we expressed above.

24(1)

In connection with this point, we note that Article VII of the 1980 Convention attributes business profits earned in Canada by a U.S. resident to a P.E. in Canada but, as stated in paragraph 7 thereof, only to the extent they are derived from the assets or activities of that P.E.

In our view,

24(1)

DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch