14 May 1991 Ruling 910883 F - Tax Withholding - Wages Paid by U.S. Corporation Who Does not Have an Establishment 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.

Dear Sirs:

This is in reply to your letter of March 20, 1991 wherein you requested our interpretation concerning the requirement of a corporation resident in the United States to remit, pursuant to subsection 153(1) of the Income Tax Act (the Act), Canadian income tax in respect of wages paid to employees in Canada where the U.S. corporation does not have an establishment in Canada.  You describe the hypothetical situation as follows:

1.     U.S.Co. is a corporation incorporated in and a resident of the United State.

2.     U.S.Co. does not currently carry on business in Canada or have a permanent establishment in Canada within the meaning of Article V of the Canada-V.S. 1980 Tax Convention (the Convention).

3.     U.S.Co. is contemplating seconding U.S. employees to its Canadian subsidiary for work assignments from 12 to 60 months in duration.  The U.S. employees would report for work to the Canadian subsidiary, but remain employees of U.S.Co.  They would be remunerated by U.S.Co. and remain participants of all benefit and pension plans of the American company.

It is your view that as U.S.Co. does not have an establishment in Canada as required by Regulation 102(1)(a), and as its Canadian subsidiary would not constitute a permanent establishment in Canada within the meaning of Article V of the Convention, U.S.Co. is not required to withhold amounts for wages paid to its U.S. employees employed in Canada.  In support of this view you have attached a letter from the Department to  24(1) dated May 11 1987.

Our Comments

Subsection 153(1) of the Act establishes the requirement for every person (resident or non-resident) paying an amount described therein to deduct or withhold therefrom such amount as may be determined in accordance with prescribed rules (Regulations 100 to 109) and remit that amount to the Receiver General in accordance with Regulation 108.  In addition, Regulation 200 obligates every person making a payment described in subsection 153(1) of the Act to make an information return in prescribed form in respect of such payment.

Based on the facts in the above example, it is our view that U.S.Co. will be a person described in subsection 153(1).  As to the question of whether U.S.Co. has an establishment in Canada where the employees report for work as required by Regulation 102, it is our view that the deeming provisions of Regulation 100(4) would operate to effectively deem the employees, (notwithstanding that they may report for work at an establishment of the Canadian subsidiary), to report for work at an establishment of U.S.Co. outside Canada.  As such, U.S.Co. would be required to deduct or withhold amounts for wages paid to the employees in question, remit those amounts to the Receiver General and make an information return in respect of payments described in subsection 153(1) of the Act.

In our opinion, whether or not a resident of Canada is an "employer" for purposes of Article XV of the Convention is essentially a question of fact.  If an individual comes to Canada and exercises his duties for a Canadian company and the costs, whether directly or indirectly, are borne by the Canadian company, the presumption is that the Canadian company is an employer and the individual is therefore taxable in Canada.  The individual may be paid by a United States company, but when he is performing his duties under the direction of the Canadian operation, the Canadian company may be an employer of the individual for purposes of this provision of the Convention.

In view of our comments on Article XV of the Convention, the issue as to whether or not U.S.Co. will be carrying on business in Canada in such a situation is a question of fact.  If the employees are determined not to be employees of the Canadian subsidiary, it is arguable that U.S.Co. may be carrying on business in Canada where it is supplying employees to its Canadian subsidiary and such employees are solely under the direct supervision and control of U.S.Co.  If it is determined that U.S.Co. is carrying on business in Canada, the fact that space is made available for its employees at the Canadian subsidiary may constitute a place of business for purposes of Article V of the Convention.  This position is supported by the commentary to Article 5 (pages 59 and 60) of the Model Double Taxation Convention on Income and on Capital issued by the Organization for Economic Co-Operation and Development (OECD  Model).  The place of business could also be considered to be a "fixed" one for purposes of Article V of the Convention since the place of business would be linked to a geographical site in Canada, i.e. the premises of the Canadian subsidiary.  Accordingly, for purposes of Article V, the fixed place of business could constitute a permanent establishment in Canada in view of the fact that the employees will be carrying on the business of U.S.Co. in Canada for a significant period of time.

As to the issue of the Department's letter of May 11, 1987 to 24(1) the author(s) thereof have been advised of our disagreement therewith and of the Department's official interpretation of the law as outlined above.

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

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch