17 January 2012 External T.I. 2011-0421371E5 - Permanent Establishment - NR corporation in Canada

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 facts outlined below, would a company in the United States ("USCo") have a permanent establishment in Canada for corporate tax purposes and/or for GST/HST purposes?

Position: Question of fact.

Reasons: Overview of relevant Treaty Articles provided.

XXXXXXXXXX
					2011-042137
					W. Doiron

January 17, 2012

Dear Sir:

Re: Permanent establishment - Non-resident in Canada

This letter is in response to your email in which you asked whether your company ("USCo") would have a permanent establishment in Canada for corporate tax purposes and/or for GST/HST purposes, given the following facts:

• USCo is located in the United States ("US").
• USCo's business is the provision of temporary staffing related to the performance of software and computer consulting services.
• USCo has no property (no land, no buildings, no machinery, no inventory, etc) in Canada.
• USCo does have a bank account in Canada.
• USCo has no rental operations in Canada.
• USCo maintains a "virtual office" in XXXXXXXXXX . This virtual office serves only as a mail stop and a telephone answering service.
• USCo has employees and subcontractors in the US ("US Staff"). USCo has XXXXXXXXXX
• XXXXXXXXXX ("Canadian Staff") all live and work remotely from their homes in Canada. They are free to choose their work place.
• All USCo's employees can perform their services remotely from their homes or at the client location.
• The Canadian Staff do not have authority to contract on behalf of USCo.
• The Canadian Staff do not solicit orders or make offers on behalf of USCo.
• The consulting services the Canadian Staff perform are for USCo clients in Canada and the US.
• The computers that the Canadian Staff use in their homes are not USCo property.
• None of the US Staff perform services in the US for delivery to clients in Canada. If that changes, those services would be performed in the US via the website/internet.
• None of the US Staff solicit for new clients in Canada. The Canadian clients result from USCo's US clients who have activity in Canada.
• In prior taxation years, USCo has had a permanent establishment in Canada for corporate income tax purposes but not for GST/HST purposes. The existence of the permanent establishment related to a Canadian employee who maintained a home office in Canada, performed office functions and had a corporate computer. This employee terminated in the previous taxation year. That specific employment position will not be replaced or continued.

The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Our comments

Liability for Canadian Tax

While not specifically stated in your letter, it is presumed that USCo is incorporated in the US and its headquarters are located in the US. As a result, USCo would be considered a resident of the US and therefore treated as a non-resident person under the Act. In general, pursuant to paragraph 2(3)(b), a non-resident person who carried on a business in Canada is liable to pay Canadian income tax on its taxable income earned in Canada. The determination of whether a non-resident is "carrying on business in Canada" is always a question of fact and is based on factors which have been developed through case law. After reviewing the specific factors with respect to USCo's provision of services in Canada, we would likely arrive at the conclusion that a business is carried on in Canada according to the common law tests. As a result, USCo would be liable for income tax on its taxable income earned in Canada for the year determined in accordance with section 115 of the Act.

However, since Canada and the US have signed an agreement for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital (the "Convention"), the convention must be considered to determine which country has the right to tax. In accordance with the Convention, the business income of a non-resident is generally taxable only in their country of residence, unless a taxpayer has a permanent establishment ("PE") in the other country. Pursuant to paragraph 1 of Article VII of the Convention, the business profit of a resident of the United States shall be taxable only in United States unless the resident carries on business in Canada through a PE situated in Canada. Where a Canadian PE exists, the US resident will be taxed in Canada on the business profits attributable to that PE.

Existence of a PE

Generally speaking, Article V provides the conditions that, if met, will cause a place of business in the Other Contracting State to constitute a PE, or in some cases deem the resident of a Contracting State to have a PE in the Other Contracting State. An actual determination of the existence of a PE in Canada is always a question of fact, and would only be made after a thorough review of all the relevant facts.

Paragraph 1 of Article V 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. Paragraph 2 provides further guidance in stating that a PE includes, among other things, an office. Furthermore, according to the Commentary on Article 5 of the Organisation for Economic Co-operation and Development's Model Tax Convention on Income and on Capital ("OECD Model Tax Convention"), the definition of PE contains the following conditions:

• There must be a place of business,
• the place of business must be fixed, and
• the non-resident must be carrying on its business wholly or partly through this fixed place of business.

As stated in Income Tax Technical News #33 ("ITTN 33"), these three conditions form an appropriate framework for a PE analysis and any relevant factor to a PE determination has to revolve around one of those three conditions. We suggest that you refer to the Example of Factors in ITTN 33 for items that may assist you in determining whether these conditions exist. ITTN 33 is available at http://www.cra-arc.gc.ca/E/pub/tp/itnews-33/itnews-33-e.html. Based on the information provided, it is unlikely that a PE would exist by virtue of paragraphs 1 to 5 of Article V.

If USCo is found not to have a PE by virtue of paragraphs 1, 2 and 4 to 8 of Article V, paragraph 9 provides that a PE may be deemed to exist if certain conditions are met. Paragraph 9 was added to the Convention through the 2007 Protocol and has implications for enterprises which provide services in the other Contracting State. Subject to the provisions of paragraph 3 of Article V, if an enterprise meets either of the two tests as provided in subparagraphs 9(a) and 9(b), the enterprise will be deemed to provide services through a PE in Canada.

The Technical Explanation to the Convention states in part:

• The first test as provided in subparagraph 9(a) of Article V has two parts. First, the services must be performed in the other State by an individual who is present in that other State for a period or periods aggregating 183 days or more in any twelve-month period. Second, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise (including revenue from active business activities unrelated to the provision of services) must consist of income derived from the services performed in that State by that individual. If the enterprise meets both of these parts, the enterprise will be deemed to provide the services through a PE.
• The second test as provided in subparagraph 9(b) of Article V provides that an enterprise will have a PE if the services are provided in the other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected projects for customers who either are residents of the other State or maintain a PE in the other State with respect to which the services are provided.

With respect to the first test as provided in subparagraph 9(a), USCo has three Canadian Employees who are assumed to be present in Canada for the entire year, therefore, any of those individuals could meet the conditions of the first part of subparagraph 9(a). Subparagraph 9(a) refers to an individual, therefore, the test under subparagraph 9(a) need only to be met by one of the individuals.

With respect to the second test as provided in subparagraph 9(b), it is the Canada Revenue Agency's position, as stated in Question 1 of the 2011 CTF conference - Round Table, that if services are provided in the other state through a subcontractor that is a resident of the other state and the fee payments are at arm's length, then the enterprise will not be deemed to provide services through a PE in Canada under subparagraph 9(b) with respect to those services.

Whether USCo meets the tests in subparagraphs 9(a) or 9(b) is a question of fact. Based on the information provided, we are unable to determine whether USCo would be deemed to have a PE under subparagraphs 9(a) or 9(b). However, we suggest you refer to the remainder of the Technical Explanations for paragraph 9 of Article V for further assistance.

With respect to your enquiry regarding the use of corporate laptops, the use of corporate assets can be a factor in favour of finding a permanent establishment. However, based on your factual situation, the use of corporate laptops would not likely change the determination of whether a PE exists.

The above comments are in respect of corporate tax implications, the GST/HST implications will be provided under separate cover by the GST/HST Rulings Directorate. We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch