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CRA Provides Much Needed Guidance by Issuing PE Ruling


The Canada Revenue Agency recently issued the first Canadian Advance Income Tax Ruling regarding whether a non-resident corporation has a permanent establishment in Canada where part of its business activities have been sub-contracted to its wholly-owned subsidiary in Canada. Taxand Canada discusses the guidelines issued as part of the CRA's PE Ruling.

Concerns regarding this issue are not limited to Canada. A growing trend has emerged where tax authorities in many jurisdictions are seriously examining subsidiaries' operations to consider whether they constitute a PE of the foreign parent. With this Ruling, CRA has confirmed that such a determination cannot be made automatically and must be supported by the principles and guidance of the OECD.

Taxand Canada has seen CRA auditors conclude that a parent-subsidiary relationship was in fact an agent-principal relationship when interpreting Canada's bilateral tax treaties. This has resulted in a PE assessment for the foreign parent even in situations where the so-called dependent agent is not routinely concluding contracts on behalf of the principal.

Read the facts of the ruling by Taxand Canada

Taxand's Take

The fact structure briefly described in the main article is a fairly routine structure that, on the surface, would not appear to create a Canadian PE issue for the parent company. However, as alluded to above, transactions similar to that described in the Ruling have come under attack by CRA auditors from the perspective of PEs. In the absence of formal interpretive policies by CRA regarding scenarios where parent companies establish wholly-owned subsidiaries in Canada, CRA auditors seem to have some flexibility in assessing parent companies as having a PE in Canada where they feel the circumstances support it.

However, due to the fact that the subsidiary is a separate legal entity in Canada, it cannot be said that the CRA's default position is that a PE would exist "solely" on the grounds that the premises of such subsidiary is at the disposal of the foreign parent company.

Your Taxand contacts for further queries are:
Pierre G Alary
T. +1 613 786 0132

Jim Wilson
T. +1 613 786 0196

Taxand's Take Author