7 December 1993 Income Tax Severed Letter 9333340 - PE & Employee-employer Relationship

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.

                       DRAFT

Tax Executive Institute December 7, 1993 Question No. 8

         PERMANENT ESTABLISHMENT ISSUES — CROSS BORDER
                      MANAGEMENT SERVICES

With the increase in cross-border activity generally and the increasing integration of the Canadian and U.S. operations in particular, there is also increased sharing of human resources between the parent and subsidiary company. In some cases, the U.S. company may provide consulting services to the Canadian subsidiary by sending employees to perform work for the Canadian company on a project-by-project basis. The Canadian subsidiary then reimburses the parent company for the costs incurred. We request your response to the following questions:

         1.  Would a U.S. resident individual sent by the U.S.
             parent company to perform consulting services for
             the Canadian subsidiary be considered as an
             employee of the Canadian company for withholding
             and remitting of employee source deductions?

         2.  If a project was located in Canada, would the U.S.
             parent company be considered to be carrying on
             business in Canada for purposes of the Goods and
             Services Tax ("GST") or the Income Tax Act (the
             "Act")?

         3.  Would the U.S. parent company be deemed to have a
             permanent establishment ("PE") in Canada under the
             Canada-U.S. Income Tax Convention (the "U.S.
             Convention")?

Department's Position

1.       It is always a question of fact whether an
         employer-employee relationship exists in any
         particular situation.

         Employee of Canadian Subsidiary

         If a U.S. resident individual comes to Canada and
         exercises duties for a Canadian company which is a
         subsidiary to a U.S. parent company and the costs
         relating to the individual's services are
         borne by the Canadian subsidiary, whether
         directly or indirectly, there is a
         general presumption that the individual is an
         employee of the Canadian subsidiary.  Thus, any
         remuneration paid to the individual in respect of
         his services rendered in Canada for the Canadian
         subsidiary would be subject to Part I tax in
         Canada unless the facts dictate the contrary.

         Employee of U.S. Parent

         Where the U.S. individual is in fact an employee of
         the U.S. parent, he would be subject to Part I tax
         on any remuneration relating to his services
         rendered in Canada unless such remuneration is
         exempted from Part I tax by virtue of paragraph 2
         of Article XV of the U.S. Convention.  Where the
         remuneration for services exercised in Canada in a
         particular calendar year exceeds $10,000 (Canadian)
         and the remuneration is borne by a Canadian PE of
         the U.S. parent, such remuneration would be subject
         to tax in Canada even if the U.S. individual is not
         present in Canada for a period or periods exceeding
         183 days in that calendar year.

2.       It is a question of fact whether a company is
         carrying on business in Canada.  Such a
         determination can only be made after examining all
         of the circumstances, after considering the
         definition of "business" in subsection 248(1) of
         the Act and the extended meaning of  "carrying on
         business" in section 253 of the Act, and after
         reviewing the relevant jurisprudence and
         commentaries relating to this issue.

         If the provision of consulting services represents
         part of a U.S. Company's business activities, we
         would generally consider the U.S. company to be
         carrying on business at those locations where its
         employees render the consulting services on behalf
         of the U.S. company.  This is in line with the
         comments in paragraph 26(g) of Interpretation
         Bulletin 
IT-270R2
.

         The GST publication entitled "Doing
         Business in Canada—A Guide for Non-
         Residents" and the Memorandum GST 200-1-1
         provide comments on the meaning of
         "carrying on business in Canada" for
         purposes of the GST.

3.       Where it is determined that the U.S. parent is
         carrying on business in Canada, it remains a
         question of fact whether the U.S. parent has a PE
         in Canada under Article V of the U.S. Convention.
         Such a determination can only be made on a case by
         case basis.

         In a case concerning the provision of consulting
         services, the Department would consider whether the
         U.S. parent's place of business in Canada is
         situated in the business premises of its Canadian
         subsidiary.  With respect to this point, it should
         be noted that paragraph 4 of the Commentary on
         Article 5 of the OECD Model Tax Convention supports
         the view that a "place of business" may exist where
         a Canadian subsidiary makes space available for its
         U.S. parent to perform services.  If such space is
         provided on a lengthy, continuous or recurring
         basis, the U.S. parent may be considered to have a
         fixed place of business (i.e. a PE) in Canada.
         Jurisprudence supporting this view includes the
         following cases:

         -Joseph Fowler v. MNR 
90 DTC 1834 (TCC)

         -The Norwegian cases of:

         Johansson and Scanwell v. Stavanger
         Municipality dated September 5, 1989

         Creole Production Services Inc. v. Stavanger
         Municipality dated April 14, 1981

Author: G. Middleton File No: 933334 Date: December 7, 1993

Subject: Permanent Establishment, Fixed Place of Business,
         Carrying on Business, and Employee/Employer
         Relationship

Applicable Sections  : -Art. V & XV of the U.S. Convention and Art. 5 &
                        15 of OECD Model

                       -Sections 115(1), 248(1) & 253