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Non-Resident Subsidiaries Facing PE Issues


In recent years, the Canadian approach to permanent establishment determinations have become a source of confusion and uncertainty for Canadian and non-resident taxpayers alike. Due to some debatable audit activity by the Canada Revenue Agency and other tax administrations around the world, the potential existence of a PE has quickly become, along with transfer pricing, one of the biggest tax concerns among corporations today. Taxand Canada discusses the likely effect of the recent guidance from the Tax Court of Canada and CRA's Income Tax Rulings Directorate.

General PE Principles
If a non-resident carries on business in Canada, the non-resident is liable for tax in Canada pursuant to subsection 2(3) of the Income Tax Act, subject to the application of a relevant treaty. Generally, Article 7 of Canada's treaties requires the business to be conducted through a PE in Canada in order for Canada to tax. The threshold for a non-resident of Canada to be considered to carry on business in Canada is easily met. Therefore, for all intents and purposes, it is the treaty relief provided by the PE rule in Article 7 of Canada's treaties that is of critical importance to foreign entities expanding their operations to Canada.

Taxand Canada assesses the Ruling in the context of a PE determination involving a parent-subsidiary structure

Taxand's Take

Until this Ruling, the CRA had not published any formal guidelines as to the circumstances in which it may consider whether the premises of a subsidiary can constitute a PE of its parent company. With so much uncertainty in the tax community as to whether CRA auditors will challenge these structures in the context of the parent company having a PE in Canada, this Ruling is an extremely positive step in the right direction for CRA. One must remember that in the absence of jurisprudence and formal guidelines from CRA on these issues, CRA auditors may propose adjustments based on their interpretation of the law. These interpretations are not necessarily the formal views of the CRA. The recent Canadian jurisprudence and the Ruling from CRA described above are huge factors that will either prevent auditors from raising unsupportable PE assessments or strengthen a non-resident taxpayer's chances of an expedient and successful resolution of the matter in CRA Appeals, the Courts or the competent authority process.

Your Taxand contacts for further queries are:
Jim Wilson
T. + 1 613 786 0196

Pierre Alary
T. + 1 613 786 0132

Taxand's Take Author