13 October 2010 Internal T.I. 2010-0378421I7 - 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: In the context of ITR 400, whether an employee's home office can result in a permanent establishment and whether instead if an employer rents office space from which an employee works results in a permanent establishment.

Position: Generally speaking, a home office will probably not result in a permanent establishment unless the employee has the authority to contract for his employer or has a stock of merchandise owned by his employer from which he regularly fills orders which he receives. The fact that employer rents an office space from which an employee works will likely result in a permanent establishment if the day-to-day business activities of the corporation are carried on there.

Reasons: Previous positions taken. Court Cases.

							October 13, 2010
	

	Bruno Volpe					Income Tax Rulings Directorate
	Large File Case Division 		Andrea Boyle, CGA
	Toronto East Tax Services TSO
	200 Town Centre Courte
	Scarborough ON  M1P 4Y3

							2010-037842

Permanent Establishment - Home Office or Rented Office Space

I am replying to your email dated August 20, 2010, in which you asked for our views on whether a business that has a permanent establishment in one province has a permanent establishment in another province in two situations:

1. Where an employee works remotely from a home office in the other province and has no authority to contract, but the employee provides services to customers in his province of residence, would the home office result in a permanent establishment?

2. Where an employee has no authority to contract and does not provide services to customers in his province of residence, however the corporation rents an office for the employee in the other province (instead of having the employee working from home), would that office result in a permanent establishment?

Our comments

Subsection 400(2) of the Income Tax Regulations provides a definition of "permanent establishment" for the purposes of determining taxable income earned in the year in a province. Under this definition, "permanent establishment" in respect of a corporation means "a fixed place of business of the corporation", which includes, amongst other things, an office, and

• paragraph 400(2)(a) indicates that, where the corporation does not have any fixed place of business, a permanent establishment means the principal place in which the corporation's business is conducted;
• paragraph 400(2)(b) indicates that where a corporation carries on business through an employee or agent, established in a particular place, who has general authority to contract for his employer or principal or who has a stock of merchandise owned by his employer or principal from which he regularly fills orders which he receives, the corporation shall be deemed to have a permanent establishment in that place; and
• paragraph 400(2)(f) indicates that the fact that a corporation has business dealings through a commission agent, broker or other independent agent or maintains an office solely for the purchase of merchandise shall not of itself be held to mean that the corporation has a permanent establishment.

Situation 1:

Under subsection 400(2) in order to determine if a corporation has a permanent establishment in a province, we first need to consider whether the corporation has "a fixed place of business" in that province. In this situation we need to determine whether a home office through which an employee provides services to customers in his province of residence would be considered a "fixed place of business" of the corporation.

The phrase "fixed place of business" is not defined in the Income Tax Act or the Income Tax Regulations therefore we must look elsewhere for the meaning of the phrase. It has been generally agreed that there is no requirement that a fixed place of business be a place owned or rented by the corporation and, depending on the circumstances, the mere fact that a corporation has a certain amount of space at its disposal which is used for business activities may be sufficient to constitute a place of business.

However, while no formal legal right to use a place is required for a permanent establishment to exist, in the case of a home office of an employee, a corporation would essentially have no ability at all to exercise control over the premises. In The Queen v. Dudney, 2000 DTC 6169, the Federal Court of Appeal opined that no permanent establishment exists where it can be concluded from the facts that the taxpayer does not have sufficient physical control of space to be carrying on his business at a particular place. In Sunbeam Corporation v. M.N.R., 62 DTC 1390, the Supreme Court of Canada indicated: "I do not agree that the fact that such employee, for the discharge of his duties under his contract, set up an office in his own premises constituted that office a branch, an office or an agency of the appellant." Generally, a home office would be under the complete control of an employee and would probably not be objectively identified with the business of the corporation. Under these circumstances, it is questionable whether the home office could be viewed as "a fixed place of business of the corporation."

Under paragraph 400(2)(b) of the Regulations, in the absence of the existence of a fixed place of business of the corporation, an employee or agent can be deemed to operate a permanent establishment of a corporation only if he has authority to contract for his employer or principal, or if he has a stock of merchandise from which he regularly fills orders which he receives. In the absence of these conditions being met, it is doubtful in Situation 1 that a home office would be considered a permanent establishment.

Situation 2:

In our view, once a corporation rents an office and has an employee who conducts the "day-to-day business of the corporation" through that office, that office would be considered a "fixed place of business of the corporation." It would be necessary to examine the nature, extent and
frequency of activities that are conducted in an office in each case to determine if the day-to-day business of the corporation is conducted at that place. "Day-to-day business" means any activity of the business that is frequent and regular and the activity does not have to generate profit or be directly related to profit generating activity.

It is possible, therefore, that a corporation could rent an office and, if it does not carry on the day-to-day business of the corporation through that office, the office would not be considered a permanent establishment. Paragraph 3 of IT-177R2 Permanent Establishment of a Corporation in a Province indicates that the fixed places of business set out in subsection 400(2) of the Income Tax Regulations are "not exclusive nor are they absolute" and paragraph 400(2)(f) of the Regulations provides a specific instance of this, when it states that if a corporation maintains an office solely for the purchase of merchandise this does not, by itself, mean that a corporation has a permanent establishment.

However, in Situation 2, the employee would appear to be carrying on the day-to-day business of the corporation in a fixed place of business of the corporation therefore the corporation would likely have a permanent establishment in the province.

We trust that these comments will be of assistance.

Yours truly,

Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch