14 October 1993 External T.I. 9328100 F - PE Income Received After Cessation of Branch

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.

Corporate Management Tax ConferenceCanada-U.S. Income Tax Convention

Permanent Establishment & Refund Interest

QUESTION 55

Assume that on July 1, 1991 a U.S.resident for the purposes of the Canada - U.S. tax Convention (the "Convention") ceased to carry on business in Canada through a permanent establishment. In 1993 the non- resident became entitled to receive refund interest from the Canadian Government in respect of tax imposed on its Canadian business.

1.     Is the non resident subject to tax in 1993 on "refund interest" pursuant to S. 115 of the Act?

2.     Does Article XI paragraph 3(c) of the Convention exempt this income from tax in Canada?

3.      Do Article XI paragraph 5 and Article VII paragraph 1 of the Convention permit Canada to tax the interest as business profits attributable to the former Canadian permanent establishment?

Department's Position

1)     Yes. The non-resident is subject to tax in 1993 on the "refund interest" pursuant to section 115 of the Act. This section must be read in conjunction with subsection 2(3), which subjects the income of a non-resident to tax. As a result of the reference in subsection 2(3) to "a previous year", the provision is sufficiently broad to tax a non- resident person on such business income even when it is received in a taxation year subsequent to that in which the non-resident ceased to carry on business in Canada.

2)     No. In this situation the debt-claim in respect of which the interest is paid is effectively connected with the permanent establishment or fixed base of the business which was carried on Paragraph 5 of Article XI of the Convention indicate that Article VII (Business Profits) will take precedence over Article XI in such a case.

3)     Yes. Pursuant to Article VII of the Convention, Canada has the right to tax business profits if they are attributable to a permanent establishment in Canada where "the resident carries on, or has carried on, business" in the other Contracting State. Paragraph 1 of Article VII of the Technical Explanation issued by the U.S. Treasury Department indicates that

"If the resident carries on, or has carried on, business through such permanent establishment, the other State may tax such business profits but only so much of them as are attributable to the permanent establishment. The reference to a prior permanent establishment ("or has carried on") makes clear that a Contracting State in which a permanent establishment existed has the right to tax the business profits attributable to that permanent establishment, even if there is a delay in the receipt or accrual of such profits until after the permanent establishment has been terminated. "