1 June 1992 Income Tax Severed Letter 9206525 - Taxability of employees loaned between Canada and Austria

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: QUESTION OF WHO IS THE EMPLOYER ON LOANED EMPLOYEES SECTION: ART 15, ART 5]

June 1, 1992

Assessment and Accounting Programs Rulings Directorate
International Tax Programs Directorate K.B. Harding
(613) 957-8953
Attention C. Charette

920652

• Canada-Austria Income Tax Convention (the "Convention") Taxability of Employment Income

This is in reply to your memorandum of March 2, 1992 wherein you requested our opinion concerning the taxability of an individual in the following hypothetical situation.

Austriaco, a company which is a resident of Austria, has a wholly-owned Canadian subsidiary corporation (Canco). Mr. A is a resident of Austria for the purposes of the Convention and is a non-resident of Canada for the purposes of the Act. He is a member of the management team of Austriaco but he has no ownership interest in either company. Canco has obtained a large contract which will be in progress for approximately 12 months and requires Mr. A's expertise in an oversight (project management) capacity. Mr. A will provide these project management services both in Canada and in Austria. Mr. A will be present in Canada for a period or periods not exceeding 183 days in a calendar year.

Mr. A is concurrently working on other contracts in various parts of the world. Austriaco will charge Canco a management fee in respect of this project and one of the amounts included in such fee will be a charge in respect of the project management services provided by Mr. A. on behalf of the services provided by Mr. A.

Employee of Canco

In general, when interpreting paragraph 2(b) of Article XV of the Convention it is our view that the phrase "an employer" refers to the employer of the non-resident employee. It is always a question of fact whether an employer-employee relationship exists in any given situation. If a person comes to Canada and exercises his duties for a Canadian company and the costs, whether directly or indirectly, are borne by that company, the presumption is that the person is an employee of the Canadian company and is taxed on the remuneration for such services in Canada unless the facts dictate the contrary. It is not necessarily the person who pays the salary that determines whether the non-resident has a Canadian employer.

Quite often a person is paid by a foreign company (i.e.Austriaco) but when he is performing his duties in Canada he is under the direction and control of the Canadian company. In such a situation, he is considered to be an employee of that Canadian company.

Where a non-resident exercises his employment on behalf of an Canadian employer both in Canada and outside Canada a relative portion of his employment income is received in respect of his employment in Canada and paragraph 2 of Article XV of the Convention will apply only to that portion of the income that relates to the employment exercised in Canada.

Employee of Austriaco

Where a parent company, such as Austriaco, sends individuals who are in fact its employees to work in Canada on any project or projects for a period or periods of time, it would be necessary to determine whether or not that company is carrying on its business in Canada through a fixed place of business. The OECD Commentary and several tax cases in OECD countries support the view that a permanent establishment may exist where the Canadian subsidiary makes space available to any particular company in order for that company to carry out some aspect of its business in Canada.

If Austriaco has a permanent establishment and Mr. A's remuneration for services rendered in Canada is borne by such establishment, then Mr. A will be liable for tax on such remuneration in Canada. Accordingly, your Division should explore whether this "use of space" argument can be applied in situations where it is determined that certain non-residents individuals such as Mr. A are not considered to be employees of the Canadian company.

Where a parent company (i.e. Austriaco) sends individuals to its subsidiary or branch in Canada to carry out duties on behalf of the parent or head office, such as sending out an internal auditor to review the accounting systems of the Canadian operation or sending head office personnel to review the efficiency of the Canadian operations, these personnel would normally report their findings to the foreign head office or parent and such individuals would have an employer-employee relationship with the foreign parent or head office rather than with the Canadian operation.

As can be seen from the above, it is necessary for the companies and Mr. A to provide the Department with all the facts with respect to the particular arrangements involved before a decision can be made.

We trust the above is adequate for your purposes.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch