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: Whether a non-resident company would be considered to carry on business through a PE in Canada
Position: No
Reasons: The activities to be carried out in Canada by PARENT under the Proposed Transactions would not give rise to a PE in Canada for purposes of the Treaty.
XXXXXXXXXX
2011-039642
XXXXXXXXXX
XXXXXXXXXX , 2011
Dear XXXXXXXXXX :
Re: XXXXXXXXXX ("PARENT")
BN:XXXXXXXXXX
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above-mentioned taxpayer. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request.
To the best of your knowledge and that of PARENT, except as described below, none of the issues involved in this request for an advance income tax ruling is:
(i) dealt with in an earlier return of PARENT or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of PARENT or a related person;
(iii) under objection by PARENT or a related person;
(iv) before the courts, and no judgement has been issued which may be under appeal; or
(v) the subject of a Ruling previously issued by the Directorate.
Definitions
In this letter, the following terms have the meanings specified below. Unless otherwise noted, all legislative references are to the Act.
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date of this letter.
(b) "B Corporation" means XXXXXXXXXX , a corporation incorporated under the laws of Canada.
(c) "CANCO" means XXXXXXXXXX , a corporation incorporated under the laws of Canada. Its business number is XXXXXXXXXX , and it is served by the XXXXXXXXXX TSO.
(d) "XXXXXXXXXX " is described in Paragraph 2.
(e) "CRA" means the Canada Revenue Agency.
(f) "PARENT" means XXXXXXXXXX , a corporation incorporated under the laws of XXXXXXXXXX .
(g) "Parts" means XXXXXXXXXX .XXXXXXXXXX
(h) "PE" means a permanent establishment as defined in Article XXXXXXXXXX of the Treaty.
(i) "Proposed Service Agreement" means the agreement XXXXXXXXXX as described in the Proposed Transactions.
(j) "Service Agreement" means the agreement XXXXXXXXXX , as described in Paragraph 13.
(k) "Supply Agreements" is described in Paragraph 3.
(l) "Treaty" means the Canada-XXXXXXXXXX Income Tax Convention, as signed on XXXXXXXXXX .
Our understanding of the Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:
Facts
1. PARENT is a corporation formed under the laws of XXXXXXXXXX . Its address is XXXXXXXXXX . PARENT is not resident in Canada for the purposes of the Act. PARENT is a resident of XXXXXXXXXX for the purposes of the Treaty. It files its returns with the XXXXXXXXXX Tax Centre and is served by the XXXXXXXXXX Tax Services Office.
2. PARENT carries on XXXXXXXXXX separate business divisions XXXXXXXXXX . One of the divisions carries on the business of manufacturing, processing and distributing XXXXXXXXXX , including the Parts, toXXXXXXXXXX manufacturers in Canada XXXXXXXXXX .
3. PARENT entered into certain Supply Agreements with B Corporation whereby PARENT supplies B Corporation with Parts XXXXXXXXXX . The final decision to enter the Supply Agreements is taken by PARENT in XXXXXXXXXX .
4. PARENT's activities in Canada conducted directly with B Corporation as a consequence of the Supply Agreements usually consist of meetings between representatives of the two entities. Some of these meetings are program review meetings to review PARENT's performance and discuss various matters. Typically, PARENT and B Corporation conduct XXXXXXXXXX to XXXXXXXXXX program review meetings per year in Canada, each meeting lasting approximately XXXXXXXXXX to XXXXXXXXXX days. PARENT and B Corporation also hold commercial meetings to negotiate various business matters, the duration and frequency of which are similar to program review meetings. Engineering meetings are conducted to discuss technical matters such as XXXXXXXXXX the Parts. The frequency and duration of all of the meetings have varied over the years, but in any event, never exceed an aggregate of 90 days over any 12 month period.
5. In addition to the Supply Agreements with B Corporation, PARENT has entered into agreements with other customers outside of Canada for the supply of XXXXXXXXXX , as well as other customers in Canada XXXXXXXXXX whose operations are unrelated to those of PARENT's XXXXXXXXXX .
6. CANCO was incorporated on XXXXXXXXXX under the Canada Business Corporations Act.
7. CANCO is a 100% wholly-owned subsidiary company of PARENT.
8. CANCO has its head office in XXXXXXXXXX , and operates through a leased facility located at XXXXXXXXXX in XXXXXXXXXX .
9. CANCO's operations began in XXXXXXXXXX .
10. CANCO has over XXXXXXXXXX employees and has its own XXXXXXXXXX .
11. PARENT and CANCO entered into an initial Service Agreement effective as of XXXXXXXXXX for a XXXXXXXXXX -year term, XXXXXXXXXX , pursuant to which CANCO assembles the Parts (i.e. assembling XXXXXXXXXX) sold by PARENT to B Corporation. The Service Agreement was renewed and is still applicable between PARENT and CANCO as of the date hereof.
12. The Service Agreement provides that CANCO's activities are limited to the assembly of the Parts. That is, CANCO does not provide other services to PARENT or any other customer, other than services provided under the Service Agreement.
13. Under the Service Agreement, PARENT reimburses CANCO for any and all expenses, including certain costs of materials and goods, administrative expenses, interest incurred and taxes incurred by CANCO in the performance of its obligations. In addition, PARENT pays CANCO, as compensation, an amount equal to XXXXXXXXXX percent of the total amount expensed. CANCO does not take title to the Parts.
14. CANCO is not a party to any of the Supply Agreements between PARENT and B Corporation. Pursuant to Article XXXXXXXXXX of the Service Agreement, the legal relationship between CANCO and PARENT is of the nature of an independent contractor. Moreover, the Service Agreement provides that CANCO would not in any case carry out such activities as receiving orders, negotiating commercial issues with customers and/or concluding sales contracts on behalf of PARENT. CANCO cannot otherwise bind PARENT, assume or create any obligation, express or implied, on behalf of PARENT or in the name of PARENT, or any of its officers or employees, or in the name of CANCO as a purported agent of PARENT, or to commit PARENT in any way to any obligation or contract.
15. CANCO performs the work under the Service Agreement through its own employees or by accessing the services of an employment agency.
16. In connection with the Service Agreement, PARENT's personnel visited CANCO from time to time for business meetings and to audit and monitor CANCO's performance.
17. PARENT XXXXXXXXXX by CANCO. CANCO performs activities under the Service Agreement as an independent subcontractor of PARENT. PARENT, in and by itself, does not manufacture any of the Parts in Canada. B Corporation XXXXXXXXXX .
18. PARENT's XXXXXXXXXX has no customers in Canada other than B Corporation.
19. XXXXXXXXXX
20. PARENT filed tax returns with the CRA on the basis that it did not have a PE in Canada.
Proposed Transactions
21. PARENT and CANCO will enter into the Proposed Service Agreement for a term of one year, renewable annually.
22. Under the Proposed Service Agreement, activities currently performed by CANCO under the Service Agreement will continue to be performed by CANCO. In addition, CANCO will perform additional activities currently performed by PARENT in XXXXXXXXXX under the Supply Agreements.
23. XXXXXXXXXX
24. PARENT may provide CANCO with tools to be used in the manufacture and assembly of the Parts. Title and ownership of the tools will remain with PARENT. In addition, CANCO may manufacture some of its own tools, parts and materials or may purchase the tools, parts and materials directly from XXXXXXXXXX suppliers.
25. CANCO's employees will also provide engineering and other services to PARENT including, but not limited to, XXXXXXXXXX engineering and quality assurance, in relation to the Parts.
26. CANCO will package and deliver Parts to the places as designated by PARENT.
27. All training of CANCO employees by PARENT for activities to be performed under the Proposed Service Agreement will be conducted in XXXXXXXXXX at PARENT's facilities. If CANCO carries out the training by itself, such training will take place at CANCO's facility in Canada.
28. PARENT employees will be dispatched, from time to time, to the CANCO facility in Canada to inspect, supervise and/or expedite services required under the Proposed Service Agreement.
29. Paragraph XXXXXXXXXX of the Proposed Service Agreement states that CANCO shall in no case carry out such activities as receiving orders, negotiating commercial issues with customers and/or concluding sales contracts on behalf of PARENT.
30. Pursuant to paragraph XXXXXXXXXX of the Proposed Service Agreement, the relationship of CANCO and PARENT shall remain that of independent contractor. CANCO will not have the authority to conclude contracts on behalf of PARENT or otherwise bind PARENT, assume or create any obligation on behalf of PARENT, accept service of legal process for PARENT or perform any other service for PARENT except the ones set forth in the Proposed Service Agreement.
31. The Proposed Service Agreement further provides that CANCO will not hold itself as an employee, agent, representative or partner of PARENT, or assume or create any obligation on behalf of or in the name of PARENT.
32. XXXXXXXXXX CANCO will be XXXXXXXXXX relocating its current operations to a XXXXXXXXXX facility in Canada.
33. At the XXXXXXXXXX facility, CANCO will build a XXXXXXXXXX using subcontractors (not PARENT) and CANCO will own it. CANCO will buy equipment to build the XXXXXXXXXX from third parties. In addition, PARENT will sell equipment to CANCO which is currently being operated at PARENT's factory in XXXXXXXXXX .
34. CANCO will communicate with several XXXXXXXXXX suppliers ("third party suppliers") to request their XXXXXXXXXX proposals to establish the XXXXXXXXXX . The third party suppliers will deliver the XXXXXXXXXX to CANCO's XXXXXXXXXX facility. Then, CANCO will XXXXXXXXXX at the XXXXXXXXXX facility using other subcontractors. The managers of CANCO will control such construction work. The installation work will take XXXXXXXXXX to XXXXXXXXXX months.
35. During the construction of the XXXXXXXXXX , PARENT XXXXXXXXXX engineers (around XXXXXXXXXX people) may visit CANCO to give advice. However, such engineers will not have to be situated at the new CANCO facility constantly; most of the support work can be done in XXXXXXXXXX .
36. It is expected that PARENT will be present at the CANCO facility in Canada for a period or periods not exceeding in the aggregate 90 days within any 12 month period. In the event that significant time is required to be spent at the CANCO facility in Canada by PARENT employees, PARENT will second certain employees to work for CANCO. However, at the current time, secondments of this nature are not contemplated in connection with the Proposed Transactions.
37. PARENT will not own or lease any space in Canada. CANCO's XXXXXXXXXX facility will not make available for PARENT XXXXXXXXXX that would create any degree of identification to which CANCO's location in Canada could be objectively identified as PARENT's business location. CANCO's XXXXXXXXXX facility will also have XXXXXXXXXX which will be shared by its own employees and non-CANCO employees. CANCO's XXXXXXXXXX facility will have XXXXXXXXXX that will generally be available for all subcontractors and external visitors, including PARENT employees dispatched to Canada. However, for the most part, with the exception of meetings, the nature of the work performed by PARENT employees who are temporarily dispatched to CANCO's facility will involve XXXXXXXXXX .
38. As mentioned in paragraph 4 of facts outlined above, any direct activities between PARENT employees and B Corporation in Canada as a consequence of the Supply Agreements will remain infrequent and incidental in nature, and will likely be limited to sporadic meetings between representatives of both entities.
39. Paragraph XXXXXXXXXX of the Proposed Service Agreement provides that CANCO may enter into contracts with its own customers, provided that they do not hinder CANCO's obligations to PARENT under the Proposed Service Agreement.
Purpose of the Proposed Transactions
The purpose of the Proposed Transactions is to reduce costs, such as shipping costs, by increasing the amount of manufacturing and assembling activities performed in Canada and to reduce procurement costs from XXXXXXXXXX suppliers by procuring tools, parts and materials directly from XXXXXXXXXX suppliers. The Proposed Transactions will also seek to capitalize on the experience gained and skills developed by CANCO since its incorporation, by XXXXXXXXXX . Furthermore, as an essential measure to achieving drastic cost reduction, CANCO will implement a XXXXXXXXXX
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Definitions, Facts, Proposed Transactions and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our ruling is as follows:
- PARENT will not be considered to carry on business in Canada through a PE under Article XXXXXXXXXX of the Treaty solely because of the activities to be carried out in Canada by PARENT as set out in the Proposed Transactions.
This ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002 and is binding on the CRA provided that the Proposed Service Agreement is effective by XXXXXXXXXX .
Caveats
The ruling provided herein is based solely on the Facts and Proposed Transactions described above. Any documents submitted with your request do not form part of the Facts and Proposed Transactions and any other references thereto are provided solely for the convenience of the reader.
Nothing in this letter should be construed as implying that the CRA has reviewed, accepted or otherwise agreed to any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the ruling given above.
The above-noted ruling is based on the Act and the Treaty in their present form and do not take into account any proposed amendments to the Act or the Treaty which, if enacted, could have an effect on the ruling provided herein.
Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether:
- transfer pricing practices of entities in this letter are in accordance with section 247 of the Act; or
- other activities carried out in Canada by PARENT other than those specifically described in the Proposed Transactions would create a PE of PARENT in Canada.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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