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Canada Revenue Agency's Interpretation of "Permanent Establishment"
Under the Canada-US Income Tax Convention (the "Treaty"), a corporation resident in the United States may be taxed in Canada where its activities give rise to a "permanent establishment". If a US corporation is deemed to have a permanent establishment in Canada, the US corporation will be subject to Canadian tax return filing obligations and will be required to pay tax to the Canada Revenue Agency ("CRA") on business profits attributable to that permanent establishment.
A permanent establishment is generally defined to include either a fixed place of business (e.g. an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the US corporation. Furthermore, a recent addition (effective 1 January 2010) to the Treaty provides that a US corporation may be deemed to have a Canadian permanent establishment if it either:
(a) performs services in Canada through an individual present in Canada for an aggregate of 183 days or more in any given twelve-month period and during that period more than 50% of the gross active business revenues of the enterprise consists of income derived from services performed in Canada by that individual, or
(b) provides services in Canada for an aggregate of 183 days or more in any given twelve-month period with respect to the same or connected projects for Canadian customers.
Whether a permanent establishment exists is a question of fact, thus its meaning changes from one industry and activity to another. Recent case law has offered some guidance as to how the CRA and the courts may interpret the definition of permanent establishment from the Treaty. Taxand Canada discusses the latest interpretation of "permanent establishment" by Canada's Revenue Agency.
In making a determination of whether or not a permanent establishment exists, there are numerous factors to be considered. Which factors are most relevant in any particular case will be largely dependent upon the nature of the taxpayer's business and the particular facts and circumstances in question. Before any determination is made, all facts of a particular case must be analysed.
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