13 December 1994 External T.I. 9424005 - CANADA-U.S. TREATY AND CROSS-BORDER EMPLOYMENT

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.

		942400
XXXXXXXXXX				David R.Sénécal
(613) 957-9796

December 13, 1994

Dear XXXXXXXXXX:

This is in reply to your letter of September 12, 1994, concerning the application of paragraph 2(b) of Article XV of the Canada-U.S. Income Tax Convention (the "Convention") to a hypothetical situation where we are asked to accept the following facts:

• Mr. X is a U.S. resident.
• Mr. X is an employee of a U.S. corporation ("USCO") carrying on business in the United States.
• USCO has a Canadian sister corporation ("Canco").
• Mr. X is not an employee of CANCO.
• Mr. X receives his salary directly from USCO and receives no employment income from CANCO.
• Mr. X has no work status in Canada and is not legally entitled to be employed in Canada.
• USCO directs Mr. X to perform certain services for CANCO.
• CANCO reimburses USCO for the costs related to the services that Mr. X provides to CANCO.
• The services are performed both in Canada and in the United States although Mr. X is not physically present in Canada for more than 183 days.

We are unable to provide you with a definitive answer based on the limited facts placed at our disposal. For example, it has been our experience that, in non-arm's length, cross-border situations such as the one described above, the form of the employer/employee relationship will frequently not reflect the substance, giving rise to problems of assessing who is the real employer. As a result we are only in a position to provide you the following general comments as to our department's position.

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

Employee of a Canadian Company

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

Employee of U.S. Company

Where the U.S. individual is in fact an employee of the U.S. related company, the individual would be subject to Part I tax on any remuneration relating to his or her 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. related company, 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 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 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 related U.S. company is carrying on business in Canada, it remains a question of fact as to whether the U.S. company 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.

For example, in a case concerning the provision of consulting services, the Department would consider whether the U.S. company's place of business in Canada is situated in the business premises of the related Canadian company. 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 company makes space available for a related U.S. company to perform services. If such space is provided on a lengthy, continuous or recurring basis, the U.S. company may be considered to have a fixed place of business (i.e. a PE) in Canada.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch