21 January 2011 External T.I. 2010-0359261E5 - Carrying on Business 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: 1) Will the maintenance of a structure located on the Canadian side of the Canada-U.S. border by a resident of the United States result in the non-resident being considered to be carrying on business in Canada through a permanent establishment? 2) What rules apply to the use of equipment in Canada?

Position: 1) The non-resident will be considered to be carrying on a business in Canada - the existence of a permanent establishment will depend on the whether the non-resident's work on the structure lasts longer than twelve months; 2) The equipment will be deemed to be acquired for Canadian tax purposes at its fair market value at the time it enters and leaves Canada

Reasons: 1) Subsection 2(3) and section 115 of the Income Tax Act and Articles V and VII of the Canada-United States Tax Convention; 2) Subsection 13(7) of the Income Tax Act

XXXXXXXXXX
									2010-035926
									Phil Thompson
January 21, 2011

Dear XXXXXXXXXX :

Re: Carrying on Business in Canada

This is in reply to your letter of September 16, 2009. We apologize for our delay in our reply.

In your letter you asked if a U.S. resident contractor who performs repair work on a portion of an international structure (the "project") that is located on the Canadian side of the border will be taxable in Canada on any profits realized from such work. If so, you asked us to provide you with some guidance in determining the Canadian tax implications.

Please note that 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 a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the internet at http://www.cra-arc.gc.ca. Where the particular transactions are complete (i.e., not of a proposed nature), the inquiry should be addressed to the relevant tax services office, a list of which is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments which we trust will be of some assistance.

For the purposes of answering your question, we have assumed that the contractor is a resident of the United States and eligible for benefits under the Canada-United States Tax Convention (referred to hereafter as the "Treaty").

Our Comments

A U.S.-resident contractor will be subject to tax in Canada on the profits from the contractor's business activities in Canada to the extent that those profits are attributable to a permanent establishment ("PE") in Canada. Whether a contractor has a permanent establishment in Canada and the extent to which the profits from that business are attributable to a PE is determined by reference to the Treaty.

According to the Treaty, a building site or construction or installation project constitutes a permanent establishment if, but only if, it lasts more than 12 months. Therefore, assuming that the project is a building site or construction or installation project, the project will be considered to be a PE in Canada provided that the work lasts more than 12 months. The 12-month period begins when work physically begins and includes time spent on of the construction site by a subcontractor under the contractor's control.

It should be noted that the months referred to in the Treaty are the number of calendar months between (and including) the first and last month the project was worked on from start to finish. This means whether or not there are months (e.g., during the winter) in which the project cannot be worked on, the "unworkable" months still count towards the 12 month time-frame.

Attribution of Business Profits to the PE

Any business profits generated from the project that are attributable to a PE in Canada are subject to tax in Canada. Paragraphs 2 and 3 of Article VII of the Treaty provide the following general guidance on the methodology to be used in determining the profits that are attributable to a PE:

2. Subject to the provisions of paragraph 3, where a resident of a Contracting State carries on, or has carried on, business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the business profits which it might be expected to make if it were a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident and with any other person related to the resident (within the meaning of paragraph 2 of Article IX (Related Persons)).

3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere.

Thus, the profits to be attributed are to be based upon the fiction that the PE is a separate entity that deals at arm's length with the contractor.

Equipment Used in Canada

Business profits and gains from the disposition of business assets used in Canada are taxable in Canada. Assuming that the project is a PE, any capital equipment brought into Canada for use on the project is treated as though it was acquired at its fair market value ("FMV") the day it is brought into Canada and disposed of at its FMV the day it leaves Canada. Article XIII of the Treaty confirms that Canada has the right to tax gains from the disposition of property that form part of the business property of a PE in Canada.

More specifically:

1) On the day the equipment is first brought into Canada, the equipment is considered to be acquired at its FMV;

2) The FMV, as determined in point 1, is considered to be the equipment's capital cost. The capital cost is used for determining the amortization of the equipment. The amortization system that is used for Canadian taxation purposes is called capital cost allowance ("CCA"), which is in essence a declining balance method of amortization that uses asset class pools. The annual rate at which a capital asset may be depreciated for Canadian tax purposes depends on the class the asset is assigned.

3) On the day the equipment leaves Canada, the equipment is considered to have been disposed at its FMV.

4) On the disposition of the assets, there are generally tax consequences. For example, if the FMV at the time of disposition (see point 3) is lower than its undepreciated capital cost ("UCC") at the time of disposition, then the difference between these two values will be a deductible loss. If the FMV at the time of disposition is greater than the UCC at the time of disposition, then there is CCA recapture (income inclusion). There would also be a capital gain on the disposition of the equipment if the FMV at the time of disposition is greater than the equipment's original capital cost (as determined in point 1).

There is an accepted chart form of the CCA calculation that can be found on our website at http://www.cra-arc.gc.ca/E/pbg/tf/t2sch8/README.html (for corporations) and http://www.cra-arc.gc.ca/E/pbg/tf/t2125/README.html (for non-corporate businesses).

Technically speaking, these calculations and valuations should be conducted every time the capital equipment crosses the Canada-US border. However, as it is possible that some of the equipment may be crossing the border on a daily or near-daily basis this could become quite burdensome. For purposes of calculating the income earned in Canada, the CRA would accept the valuation of the equipment on the first day the equipment enters Canada and then on the date in which the equipment leaves Canada for the final time. Considering that the equipment may be used in both Canada and the U.S. during the same period, a reasonable pro-ration of the equipment's value would be necessary to determine the CCA available in computing income for Canadian tax purposes.

Tax Returns

A corporation that carries on a business during a taxation year in Canada must file a T2 return. An unincorporated contractor is required to file a T1-NR return if tax is payable in Canada.

Withholding and Remitting

There are withholding and reporting requirements that may apply to payments made by the contractor to other non-resident contractors or subcontractors. For example, all persons are required to withhold and remit to the CRA 15% of the amount of any payment made to a non-resident (other than an employee) for services performed in Canada.

In addition, a contractor is required to withhold and remit to the CRA amounts
(as determined under the regulations to the Income Tax Act) from remuneration paid to employees for services performed in Canada.

Taxation of Employees

A non-resident employee of a contractor is subject to tax in Canada on income from employment in Canada and is required to file annual T1-NR returns if he/she has tax payable in Canada. Filing the return may result in a refund of the taxes withheld if the Treaty provides relief from Canadian taxation or the amount withheld exceeds the employee's actual tax liability.

In the case of U.S.-resident employees working on the project, the Treaty precludes Canada from taxing their employment income if one of the following conditions is met:

1. The remuneration does not exceed ten thousand dollars ($10,000) in Canadian currency; or

2. The employee is present in Canada for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, the remuneration is not paid by person who is a resident of Canada and is not borne by a permanent establishment in Canada.

Waiver of Withholdings

The CRA provides a waiver on withholding system that provides relief from withholding taxes on both employment income and contract income. Applications are made to the local tax services office and, if approved, payors can be relieved from the requirement to withhold on some or all of the amounts paid to non-residents. Information on this system can be found in the CRA Information Circular, IC 75-6R2 Required Withholding From Amounts Paid to Non Residents Providing Services in Canada, which is available on the CRA website at: http://www.cra-arc.gc.ca/E/pub/tp/ic75-6r2/README.html.

Goods & Services Tax/Harmonized Sales Tax (GST/HST)

It may be necessary for the contractors to collect and remit GST/HST. The following is a link that will of aid in determining GST/HST liabilities and responsibilities:

http://www.cra-arc.gc.ca/E/pub/gp/rc4027/rc4027-e.html.

Contact numbers for any specific GST/HST registration issues you may have as a non-resident can be found here: http://www.cra-arc.gc.ca/cntct/gsthstnnrs-eng.html.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch