22 November 1996 TEI Roundtable, 9638900 - PERMANENT ESTABLISHMENT

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.

TEI Conference 1996 Round Table

Question XX - PERMANENT ESTABLISHMENT

Consider the following situation. Canadian Company A has permanent establishments in Ontario and Quebec. The Company has a maintenance contract to service Customer 1 at locations in province X and province Y (other than Ontario and Quebec) and Company A maintains between 5 and 10 employees at each customer location. The employees report to work daily at the customer's premises. There is a Company site supervisor at each location who reports to a Company Project Manager in Ontario.

Customer 1 provides the office area, spare parts, supplies, assemblies, test equipment, calibration services, and janitorial services. The test equipment at each Customer location is worth in excess of $100,000. The Customer's equipment being serviced at each location is worth in excess of $1,000,000. Company A's employees do not have the authority to contract on behalf of the Company at these locations. A computer and fax machine, owned by Company, are kept at each Customer location for use by Company's employees. Of the Company's aggregate gross revenues, 2.5 percent and 1.5 percent are derived from the Customer contract for work performed in Provinces X and Y respectively. Does Company A have a permanent establishment in Province X and Province Y if the Company's 5 to 10 employees are on site at each location for 1 month? 6 months? Or more than 12 months?

Department's Response

It would be a question of fact as to whether or not Company A would have a “permanent establishment” in province X or province Y within the preamble of subsection 400(2) of the Income Tax Regulations (the “Regulations”) or as to whether the company would be deemed to have a permanent establishment with the provisions of paragraphs (b) to (e) of that subsection.

It is Revenue Canada’s view that Company A is clearly carrying on business in both province X and province Y. Furthermore, the activities carried on by those employess are such that it would be essential that Company A have a contractual or implied right to the “use of space” at each customer location in order for it to carry out those activities. One must then consider whether Company A carries on those activities and has the “use of space” for a sufficient length of time so as to be considered as having a “fixed place of business” in the provinces concerned. While carrying on activities at a customer’s location for less than one month might not be considered as being a sufficient period of time, a longer period, in Revenue Canada’s view, would be indicative of Company A having a fixed place of business. Company A may also be considered to have a fixed place of business where the facts indicate that it entered into a series of short term visits to those locations under the same contract.

Even if it is determined that Company A does not have a fixed place of business in province X or Y, the company may still be deemed to have a permanent establishment in either province if it satisfies any of the criteria listed in subsection 400(2) of the Regulations. In this regard, and as stated in paragraph 6 of IT-177R2, it is Revenue Canada’s position that Company A need not own the machinery or equipment that it uses at each customer location in order to be deemed to have a permanent establishment in a province by virtue of the “substantial equipment” test in paragraph 400(2)(e).

Prepared by:      David Senécal
Date:             November 22, 1996
File:             963890