20 July 2011 Internal T.I. 2011-0395331I7 - 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: Given the scope of operations and the length of time worked at a client's XXXXXXXXXX , whether the corporation's employees working in XXXXXXXXXX constituted a PE under Part IV of the Regulations.

Position: No.

Reasons: Based on the documentation and the contract provided, the corporation acted predominately as a staffing agency with its recruiting, interviewing and payroll-servicing activities carried out in XXXXXXXXXX . The corporation did not act as a contractor or sub-contractor providing specialized services through an identifiable employee or employees.

      							July 20, 2011

      Guylaine Roy-Chevalier				Tom Posadovsky

Small and Medium Enterprises Directorate IT Rulings Directorate

      Compliance Programs Branch			Ontario Corporate Tax 

      112 Kent Street, 19th Floor			  Division

      Place de Ville, Tower B				(613) 952-8283

      Ottawa ON  K1A 0L5
								2011-039533

Attention: Guylaine Roy-Chevalier

XXXXXXXXXX - Permanent Establishment in a Province

THIS DOCUMENT CONTAINS ADVICE OR RECOMMENDATIONS DEVELOPED BY A GOVERNMENT DEPARTMENT AND AN ACCOUNT OF CONSULTATIONS OR DELIBERATIONS INVOLVING OFFICIALS OF A GOVERNMENT DEPARTMENT AND IS THEREFORE CONSIDERED TO BE EXEMPT FROM DISCLOSURE UNDER SUBSECTION 21(1) OF THE ACCESS TO INFORMATION ACT.

We are writing in reply to your correspondence dated February 8, 2011, wherein you requested our views on whether XXXXXXXXXX had a permanent establishment ("PE") in the province of XXXXXXXXXX under Part IV of the Income Tax Regulations.

Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, (the "Act") as amended, and the regulations thereunder are referred to as the "Regulations".

Background

1. XXXXXXXXXX is a public corporation resident in Canada that provides XXXXXXXXXX services to industry and government in Canada XXXXXXXXXX .

2. XXXXXXXXXX Division is based out of XXXXXXXXXX and specializes in recruiting and personnel management services.

3. In its XXXXXXXXXX and XXXXXXXXXX fiscal years, XXXXXXXXXX was XXXXXXXXXX to staff its XXXXXXXXXX in XXXXXXXXXX

4. XXXXXXXXXX did not use XXXXXXXXXX premises to XXXXXXXXXX or to otherwise carry on business. XXXXXXXXXX did not have the authority to contract on XXXXXXXXXX behalf.

5. XXXXXXXXXX and provided the necessary equipment and infrastructure required for the work to be performed. XXXXXXXXXX did not own or lease any equipment used by XXXXXXXXXX at XXXXXXXXXX premises.

6. XXXXXXXXXX contract with XXXXXXXXXX , effective XXXXXXXXXX , required XXXXXXXXXX to provide competent employees to perform various XXXXXXXXXX duties in XXXXXXXXXX . XXXXXXXXXX is specified as the employer of the personnel and is responsible for all contributions (CPP, EI, Workers' Compensation, etc.) in respect of its employees.

7. XXXXXXXXXX responsibilities included services related to: XXXXXXXXXX .

8. According to the contract, XXXXXXXXXX responsibility was to:

XXXXXXXXXX

9. XXXXXXXXXX

10. The Canada Revenue Agency ("CRA") Auditor, in his PIA Audit Report dated September 30, 2009, concluded that XXXXXXXXXX did not have a PE in XXXXXXXXXX in the XXXXXXXXXX fiscal years:

a. There was no fixed place of business (habitation of its own, distinct place with a certain degree of permanence, existence of machinery and equipment). XXXXXXXXXX did not have identification, business signs or other evidence of business activity in its client's premises.

b. XXXXXXXXXX did not use its client premises to conduct its business, XXXXXXXXXX .

c. XXXXXXXXXX employees were attached to XXXXXXXXXX ; all contractual labour agreements were signed in XXXXXXXXXX and employees were under the authority of XXXXXXXXXX office in XXXXXXXXXX .

d. XXXXXXXXXX did not carry on a business through its client's premises, but rather made delivery of personnel for the benefit of its client.

11. XXXXXXXXXX :

12. After conducting your own analysis, you agree with the CRA auditor and XXXXXXXXXX that XXXXXXXXXX did not carry on its business in XXXXXXXXXX and did not have control over XXXXXXXXXX or equipment.

13. XXXXXXXXXX

Issue

Whether XXXXXXXXXX employees working at XXXXXXXXXX in XXXXXXXXXX constituted a PE for XXXXXXXXXX in XXXXXXXXXX under Part IV of the Regulations.

Our Comments

Subsection 400(2) of Part IV of the Regulations states that a PE in respect of a corporation means a "fixed place of business". The corporation may also have a PE in certain other circumstances, such as when it carries on business through an employee or agent, or uses substantial machinery or equipment in a particular place. XXXXXXXXXX .

The expression "fixed place of business" is not defined in the Act or Regulations, but a number of examples are listed in Regulation 400(2). Interpretation Bulletin IT-177R2 (CONSOLID), Permanent Establishment of a Corporation in a Province, explains that a fixed place of business may also include a place, plant or natural resource used in the day-to-day business of the corporation. In the FCA case The Queen v Dudney [2000] 2 CTC 56, a "fixed place of business" for the purpose of Article XIV of the Canada-U.S. Income Tax Convention was described as an identifiable location with a certain degree of permanence in which the business of the enterprise is being carried on. Accordingly, such regularity and permanence would suggest that a fixed place of business is stable and not of a temporary or tentative nature. The scope of activities, regularity and length of time during which a premises is used are all significant factors in determining whether there is a fixed place of business; however, it has been our longstanding view that the activities carried on by the employees must also be such that it would be essential that the corporation has a contractual or implied right to the use of space at each customer location in order for it to carry out those activities (see 9638900). This concept was recently addressed in Knights of Columbus v The Queen [2009] 1 CTC 2163 and American Income Life Insurance Company v The Queen [2009] 2 CTC 2114. The court determined in both cases that in order to have a fixed place of business, the corporation must also have the power or right of disposal over that fixed place. One of the key factors to support the right of disposal includes the carrying on of the business of the corporation through the fixed place.

Although a business is generally considered to be carried on at the place where employees perform their duties, personnel or placement agencies provide a challenge in determining whether a PE has been created through a supply of employees. It is our view that a placement agency can be distinguished from other service companies because the place where a personnel or placement agency carries on its business may not include the place where its employees are assigned to perform employment duties. (footnote 1) Case law in this area, including Betteridge v The Queen [1999] 1 CTC 2569, Fonta v The Queen [2002] 3 CTC 2177, and Dunbar v The Queen [2006] 1 CTC 2423, supports the notion that business may not be carried on in a place simply by virtue that personnel have been placed there. However, if a placement agency provides specialized labour, it could be viewed that the corporation has entered the realm of being a contractor or subcontractor providing specialized services through an identifiable employee or employees. Generally, the courts view the presence of risk as indicative of a contract of services. Ultimately, whether a corporation is acting as a personnel agency or a contractor or sub-contractor for services is a question of fact. Each contract must be examined to determine the profit-producing activities or services the corporation has committed itself to perform and what actual risks are born by the corporation in the performance of those activities.

Based on our examination of the submitted documentation and the contract between XXXXXXXXXX and XXXXXXXXXX , we are of the view that XXXXXXXXXX did not have control or a right of disposition over XXXXXXXXXX business premises. The contract concerns the provision of employees and staffing-related functions rather than the provision of professional services to operate a XXXXXXXXXX . This was evident in that there was no description of services to be provided by employees, only what services XXXXXXXXXX would provide in respect of the employees. XXXXXXXXXX carried out its profit-producing activities, namely recruiting, interviewing and payroll-servicing activities, out of its offices in XXXXXXXXXX and its business risk and opportunity for profit was limited to the performance of those services. All risks connected with the successful operation of the XXXXXXXXXX rested with XXXXXXXXXX . Taking these factors into account, we agree with your conclusion that XXXXXXXXXX provision of employees to staff XXXXXXXXXX in XXXXXXXXXX in XXXXXXXXXX did not result in the creation of a PE in the province of XXXXXXXXXX during the audit period for the purposes of Part IV of the Regulations.

Please note that even though we have provided our views from a federal perspective, such views would not be binding on the revenue authority of the Province of XXXXXXXXXX as provincial taxation is the responsibility of each provincial government and the CRA does not administer the XXXXXXXXXX income tax regime.

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

Yours truly,

Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

c.c. Robin Maley, Manager
International, Provincial and Strategic Policy Division
Legislative Policy Directorate

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Please refer to external interpretation document 2002-0137407 for the purposes of the Overseas Employment Tax Credit, and 2004-0059261E5 for the purposes of Part IV of the Regulations.