CRA rules on a foreign construction company avoiding a PE in Canada through seconding employees to its Canadian sister and coming to Canada for up to 90 days annually in offsite meetings

A ruling describes some sort of large construction project in Canada (or, more precisely, two “Projects”) where many or most of the risks and financial benefits of the Projects apparently will be those of a non-resident company (“ForCo”) (which is a treaty resident of an unnamed country), while at the same time a permanent establishment of ForCo in Canada under the Treaty will be avoided. A Canadian sister company of ForCo (“CanCo”) entered into the Project contracts, but subcontracted to ForCo the work that did not entail direct construction or installation work.

However, various ForCo employees are key to the Projects, including the construction work, which in theory will be carried on only by CanCo. Their involvement will be handled in two ways. Some of ForCo’s employees will be “seconded” to the ForCo, so that they will be treated as CanCo employees, notwithstanding that they will stay on the ForCo payroll. Second, in the case of ForCo employees whose role does not require them to attend the construction sites, they will come to the CanCo offices (outside the construction sites) for meetings, which are stipulated to “never exceed an aggregate of 90 days over any 12 month period.”

CRA ruled that there will be no Reg. 105 withholding on the payroll reimbursement payments made by CanCo to ForCo and that the described activities (i.e., subcontracting to ForCo, secondments and meetings) will not by themselves result in a ForCo PE under the Treaty. The CRA approach to secondments is more favourable than in some Indian cases (e.g., Centrica, Bamford).

A dilemma faced by ForCo was that in order for CRA to accept that the payroll reimbursements were not fees for services rendered by ForCo in Canada, CRA required that there be no mark up (see also 2013-0474431E5 respecting a similar seconding issue under s. 95(2)(b)(ii)), whereas no mark up would look odd from a transfer pricing perspective. CRA did not comment directly on this, but received a rep that all “transfer prices for transactions between CanCo and ForCo will be determined in accordance with the arm’s length principle.”

Neal Armstrong. Summary of 2014-0542411R3 under Treaties – Art.5 and ITA s. 247(2).