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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
5-940793
XXXXXXXXXX (613) 957-8953
Attention: XXXXXXXXXX
November 1, 2018
Dear Sir\Madam:
This is in reply to your letter of March 22, 1994 in which you requested our opinion as to whether a U.S. corporation has a permanent establishment in Canada in the situation described in the following paragraphs.
XXXXXXXXXX
XXXXXXXXXX
Under these contracts, US CO will send, for an agreed amount of money, trained employees to the customer site to provide the required implementation consulting services.
You would like to know whether the overall project might be considered an "installation project" for the purposes of Article V, paragraph 3 of the Canada-United States Income Tax Convention, 1980 (the "Convention"), and therefore a permanent establishment if it exceeds 12 months. You mentioned that an implementation project includes many services other than the actual installation of the software (which usually spans 3-5 days) and the time frame of the other services can expand or contract depending upon each customer's needs. You consequently maintain that even where the overall contracts extend over 12 months, US Co should not be considered to have a permanent establishment since the "installation" portion of the contract would be less than 12 months. You provided additional information regarding such implementation contracts as well as a standard implementation plan.
It appears that the interpretation you seek relates to specific taxpayers, and therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada, Customs, Excise and Taxation. Confirmation of tax consequences involving specific taxpayers will generally only be provided in response to a request for an advance tax ruling. Whether a non-resident carrying on business has a permanent establishment in Canada and whether any particular implementation plan for a computer software application should be characterized as an "installation project" for the purposes of the Convention are questions of fact that are generally the District Office's responsibility. Moreover, it is difficult to form an opinion based on the limited information in your letter. Nevertheless, we offer the following comments.
Generally, it would seem that a project should be regarded as an installation project if installation is the primary and most important activity. In this regard, it is necessary to determine what activities of a project can properly be regarded as installation activities and their relative importance. We have not developed any criteria of general application regarding what constitutes an installation activity; the word "installation" should probably receive its normal and customary meaning in most situations. We note that the word "implementation" is not synonymous with "installation" and does in fact appear broader in the case of computer software. The fact that an implementation project may encompass some installation activities should not lead to the immediate conclusion that the project is an installation project, particularly if the installation activities are not significant.
If it is determined that a project is an installation project, it is the duration of the project that is critical. The fact that the installation portion of an installation project lasts less than 12 months is not relevant if the project as a whole lasts more than 12 months. Presumably, the location of the installation project will determine the location of the permanent establishment.
Paragraph 1 of Article V of the Convention states that 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. The Department generally considers that a non-resident corporation is carrying on business where its employees are rendering the services (Interpretation Bulletin IT-270-R2, paragraph 26 (g)). Accordingly, a taxpayer with a fixed place of business in Canada could be found to have a permanent establishment pursuant to this provision notwithstanding that the deeming rules in paragraph 2 and 3 of the Convention are not applicable to him. Since Article V of the Convention is patterned after the OECD Model, it is our view that the Commentary in the OECD Model is relevant in determining the meaning of "place of business". In particular, paragraph 4 of the Commentary under Article V of the OECD Model reads:
The term "place of business" covers any premises, facilities or installations used for carrying on the business of the enterprise whether or not they are used exclusively for that purpose. A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal. It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise.
We refer you also to two Norwegian tax cases on this question, namely Johanssen and Scannell v. Stavanger Municipality, September 5, 1989 and Creole Production Services Inc. v. Stavanger Municipality, April 14, 1981.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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