29 August 2012 External T.I. 2012-0433791E5 - 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.

Principal Issues: How do you compute days present in the U.S. for purposes of subparagraph 9(a) of Article V of the Treaty.

Position: Total number of days present in the U.S. in any twelve month period provided that the period includes the days on which services were actually performed in the U.S.

Reasons: See the Technical Explanation to the 2007 Protocol to the Treaty

XXXXXXXXXX
							2012-043379
							A. Seidel
							(613) 957-2058

August 29, 2012

Dear XXXXXXXXXX:

Re: Permanent Establishments

This is in reply to your January 19, 2012 e-mail wherein you requested our views as to whether subparagraph 9(a) of Article V of the Canada- United States Tax Convention (the “Convention”) applies in the circumstances described below.

Background

Situation #1

A Canadian resident individual (“Mr. A”) is a full time employee of a U.S. resident employer. Mr. A’s duties of employment require him to be present in the U.S. for 240 days in any twelve month period. Mr. A also operates a small service business through a wholly-owned Canadian corporation (“Canco”). All of Canco’s customers are U.S. resident businesses. Two thirds (2/3) of Canco’s gross active business revenue is earned over a period of 30 additional days in the same twelve month period that Mr. A is present in the U.S. to perform his duties of employment for the U.S. employer. The remaining one third (1/3) of Canco’s gross active business income is earned while Mr. A is physically present in his home office in Canada.

Situation #2

Mr. A provides services to U.S. resident businesses as an employee of a Canadian resident corporation (“Canco”). All of Canco’s gross active business revenue is earned in the U.S. while Mr. A is present therein for a total of 150 days in any twelve month period. In addition to the above, Mr. A is frequently present in the U.S. for personal reasons such as shopping, attending sporting events and vacations. These activities result in Mr. A being present in the U.S. for another 50 days in the same twelve month period that Mr. A is present in the U.S. to perform services on behalf of Canco such that Mr. A is present in the U.S. for a total of 200 days in the relevant twelve month period.

Situation #3

Mr. A does not own any of the issued shares of a Canadian resident corporation (“Canco 2”) and is not related to the shareholder(s) of Canco 2. Mr. A is employed by Canco 2 and his employment duties require him to be present in the U.S. for 150 days in any twelve month period. Canco 2’s only source of gross active business revenue is from Mr. A performing services for U.S. resident businesses on behalf of Canco 2. In addition to the above, Mr. A is frequently present in the U.S. for personal reasons such as shopping, attending sporting events and vacations. These activities result in Mr. A being present in the U.S. for another 50 days in the same twelve month period that Mr. A is present in the U.S. to provide services on behalf of Canco such that Mr. A is present in the U.S. for a total of 200 days in the relevant twelve month period.

Our Comments

It is not this Directorate’s practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, “Advance Income Tax Ruling”, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Where a situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office (“TSO”) for their views. A list of TSOs is available on the “Contact Us” page of the CRA website.

The following general comments may be of assistance.

Article VII of the Convention provides that the business profits of a resident of Canada shall be taxable only in Canada unless the resident also carries on business in the U.S. through a permanent establishment situated therein. Where a Canadian resident carries on, or has carried on, business as aforesaid, the business profits of the Canadian resident may be taxed in the U.S. but only so much of them as is attributable to a permanent establishment situated in the U.S.

In general, Article V of the Convention provides that, for the purposes of the Convention, the term “permanent establishment” means a fixed place of business through which the business of a resident of a Contracting State is wholly or partly carried on. Pursuant to paragraph 9 of Article V, however, subject to paragraph 3 of Article V, an enterprise that would otherwise not be considered to have a permanent establishment in a contracting state will be deemed to have a permanent establishment in that contracting state where either of the following two conditions is satisfied:

(a) services are performed in the U.S. by an individual who is present in the U.S. for a period of, or periods aggregating, 183 or more days in any twelve-month period and during that period, or those periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in the U.S.; or

(b) services are provided in the U.S. for an aggregate of 183 or more days in any twelve-month period with respect to the same or connected project(s) for customers who are either residents of the U.S. or who maintain a permanent establishment in the U.S. and the services are provided in respect of that permanent establishment.

In each of the situations described above an employee of a Canadian enterprise is performing services in the U.S. The concern is whether the provision of such services results in the Canadian enterprise being deemed to have a permanent establishment in the U.S. pursuant to subparagraph 9(a) of Article V of the Convention. As the issue in each of the situations is whether the U.S. is entitled to tax the Canadian enterprise’s income, we would point out that the determination of whether or not a Canadian enterprise is deemed to have a permanent establishment in the U.S. under subparagraph 9(a) of Article V of the Convention would generally be the responsibility of the Internal Revenue Service.

Nevertheless, it is our understanding that whenever more than 50 percent of the gross active business revenue of a Canadian corporation consists of income derived while services are performed in the U.S. by one of its employees, and that employee is present in the U.S. for more than 183 days in any twelve month period that includes the period during which the services were performed, the conditions enumerated in subparagraph 9(a) of Article V of the Convention would be satisfied and the Canadian corporation would be deemed to have a permanent establishment in the U.S. It is also our understanding that whether or not the employee is also a shareholder of the Canadian corporation is not relevant in determining whether subparagraph 9(a) of Article V applies.

As stated in the Technical Explanation to the 2007 Protocol to the Convention, for the purposes of subparagraph 9(a) of Article V, the method of counting days differs from the method for subparagraph (b). Subparagraph 9(a) refers to days in which an individual is present in the U.S. Accordingly, physical presence during a day is sufficient to be included in determining whether the 183 day test is met. Alternatively, for the purposes of subparagraph 9(b) of Article V, the Technical Explanation to the 2007 Protocol to the Convention states that only days during which services are actually provided by the enterprise are to be taken into account when determining whether the 183 day requirement therein is satisfied.

We trust our comments are of assistance.

Yours truly,

International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch