9 October 1992 Income Tax Severed Letter 9215385 - Trinidad 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.

5-921538
                                           D.J. Powrie
             24(1)                         (613) 957-2109

Attention: 19(1)

October 8, 1992

Dear Sirs:

Re: Article V of the Canada- Trinidad and Tobago Income Tax Agreement

This is in reply to your letter dated May 11, 1992 in which you requested our opinion as to the interpretation of Article V of the Canada - Trinidad and Tobago Income Tax Agreement.

The facts described in your letter appear to involve a particular taxpayer and an existing situation. The Rulings Directorate does not provide opinions in respect of existing situations. For definitive assistance in this matter, you should contact your District Office.

We can provide you with some general comments regarding the interpretative issues raised in your letter. Our discussion is based on the following hypothetical situation:

1. Trinico is a company resident in Trinidad and Tobago under the laws of Trinidad and Tobago and within the meaning of Article III.

2. Trinico carries on the business of providing consulting services in respect of the installation and customization of computer software and the training of personnel in the use of such software.

3. Trinico's consulting business is, in part, carried on in Canada.

4. Canco is a company resident in Canada under the Income Tax Act (the "Act") and within the meaning of Article III. Canco deals at arm's length with Trinico.

5. Trinico provides Canco with consulting services and Canco pays it a fee for its services.

Issue

You have asked whether Trinico's profits from the consulting fees received from Canco are (assuming they arise from Trinico carrying on all or part of its business in Canada and would thus would be subject to tax under Part I of the Act) exempt from tax under paragraph 1 of Article V.

Discussion

Trinico's profits from such fees will be exempt from tax under paragraph 1 of Article V if:

1. The profits are "industrial or commercial profits" of Trinico; and

2. they are not attributable to a permanent establishment in Canada through which Trinico carries on all or part of its business.

If the profits are not industrial or commercial profits then the treaty will not exempt them from tax under the Act.

If the profits are attributable to a permanent establishment in Canada through which Trinico carries on all or part of its business, then the treaty will not exempt them from tax under the Act.

Discussion - Industrial or Commercial Profits

The determination of whether Trinico's profits are "industrial or commercial profits" would require an examination of all the circumstances. However, it appears that Trinico's profits would be "industrial or commercial profits"; apparently they derive from activities of a commercial nature.

Under paragraph 6 of Article V, "industrial or commercial profits" do not include "remuneration for personal (including professional) services". In the Department's view, Trinico's profits are not remuneration for "personal (including professional) services". The fact that the services are rendered by Trinico (rather than an individual) precludes them from being characterized as personal (including professional) services.

Discussion - Permanent Establishment

If Trinico's profits are from industrial or commercial activities, then they will be subject to tax in Canada to the extent they are attributable to Trinico's carrying on all or part of its business through a permanent establishment in Canada. Whether Trinico carries on all or part of its business in Canada through a permanent establishment is a question of fact requiring an examination of all the circumstances.

The term permanent establishment is defined in Article IV of the Trinidad treaty. The basic definition ("a fixed place of business in which the business of the enterprise is wholly or partly carried on") is substantially the same as the basic definition in Article 5 of the 1977 Organization for Economic Co-operation and Development Model Convention for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (the "OECD Model") ("a fixed place of business through which the business of an enterprise is wholly or partly carried on").

In our view, it is quite possible that the activities of Trinico (which may include having its employees work on location in Canada for an extended period or for regular short periods in space provided by Canco) are carried out through a permanent establishment. As stated in paragraph 4 of the commentary to Article 5 of the OECD Model:

A place of business may 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.

The Norwegian case of Johansson and Scanwell v. Stavanger Municipality is a recent judicial application of the principle set out in the commentary. The case concerned 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 OECD Model. 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 permanent establishment in Norway.

If all or part of Trinico's consulting activities are carried out in Canada through a "place of business" then the issue arises as to whether the "place of business" is a "fixed" one. This, again, is a question of fact. We note that the Canadian courts have found permanent establishments to exist where the place of business existed only for the term of a project of fixed duration (the actual phrase used by the tax appeal board was "for the duration of the enterprise" (Les Enterprise Blaton Aubert Société Anonyme v. MNR 69 DTC 121 (TAB), aff'd 73 DTC 5009 (FCTD)) and where the business was carried on in the same place for a short period on a recurring basis (Joseph Fowler v. MNR 90 DTC 1834 (TCC)).

Additional Queries

You also asked questions regarding the status of a treaty currently being negotiated and the Trinidadian view of the issues raised above. The inquiry regarding the status of treaty negotiations should be directed to Mr. J.M. Déry of the Department of Finance ((613) 992-1862) and the inquiry regarding the view of the government of Trinidad and Tobago should be directed to its representatives.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada, Taxation.

Yours truly,

for Director Reorganizations and Foreign Division Rulings Directorate Legislative and Intergovernmental Affairs BranchNote to file 921538 October 9, 1992

The interpretation given above turns on the peculiat wording of the Trindad treaty. In Treaties which follow the pattern of the 1977 OECD model, it is the Department's view that Independant Personal Services may include such services rendered through a corporation.

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