Overview
This page summarizes the CRA technical interpretation 2010-038195, which analyzes whether a non-resident corporation has a Permanent Establishment (PE) in Canada based on four specific business scenarios.
Although titled “Branch vs. Subsidiary,” this ruling does not discuss those corporate legal structures.
Instead, it focuses entirely on determining when a foreign corporation is considered to be carrying on business in Canada under:
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ITA subsection 2(3)(b)
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ITA section 115(1)
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Canada–U.S. Tax Treaty, Article V
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OECD Commentary
The ruling provides CRA insight into PE determination, which is directly relevant to whether a foreign corporation is treated as having a branch (i.e., a taxable Canadian presence).
Relevant Legislative Framework
Income Tax Act (Canada)
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s.2(3)(b) — Non-resident taxation on income earned in Canada
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s.115(1) — Non-resident carrying on business in Canada
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s.253 — When a non-resident is deemed to carry on business
Canada–U.S. Tax Treaty (Article V)
CRA references the following Treaty subsections:
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Article V(1) — General definition of PE
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Article V(2) — Examples of PE (office, workshop, factory, etc.)
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Article V(3) — Services PE
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Article V(5) — Dependent agent PE
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Article V(6) — Independent agent exception
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Article V(7) — Activities not constituting PE
Core CRA Question
Does the foreign corporation have a Permanent Establishment (PE) in Canada under the Treaty and is it “carrying on business” in Canada under the Income Tax Act?
If yes →
➡ The foreign corporation is taxable in Canada on Canadian-source business profits.
➡ Must file a T2 Non-Resident Tax Return.
Scenario Analysis — CRA Conclusions
Scenario 1 — Non-Resident Leases Space in Canada
Facts
A foreign corporation leases space in Canada for business activities such as storage, display, or operations.
CRA’s Analysis
A PE likely exists if:
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The space is at the disposal of the foreign corporation
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The activities performed there are core to the business
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The arrangement has continuity and permanence
Using leased Canadian space usually satisfies the Article V(1) “fixed place of business” test.
CRA Conclusion
➡ A Permanent Establishment exists.
Scenario 2 — Canadian Agent Performs Business Activities
Facts
A Canadian agent acts on behalf of the foreign corporation.
Key Determining Factors
CRA applies Article V(5):
A dependent agent creates a PE if they:
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Habitually exercise authority to conclude contracts
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Do not act independently
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Are economically dependent on the foreign corporation
CRA Conclusion
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If the agent is dependent → PE exists
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If independent under Article V(6) → No PE
Scenario 3: Foreign Employees Regularly Come to Canada to Conduct Work
Facts
Foreign employees travel to Canada to perform services, negotiate transactions, or perform core functions.
CRA’s Analysis
Regular or repeated activity may constitute:
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A services PE under Article V(9)
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A fixed place PE if the work is done repeatedly at the same Canadian location
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“Carrying on business” under ITA s.115(1)
CRA Conclusion
➡ A PE may exist based on frequency, duration, and commercial significance of activities.
Scenario 4 — Inventory Stored in Canada
Facts
Goods are stored in Canada at a warehouse or third-party facility.
Treaty Analysis
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Article V(7) states that storage for delivery alone does not create a PE
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BUT if the inventory is used for regular sales activity or order fulfillment → PE may exist
CRA Conclusion
➡ Short-term or incidental storage: No PE
➡ Operational inventory storage: PE exists
CRA Interpretation — Key Principles
From this ruling, the CRA establishes the following:
1. “Carrying on Business” Is a Broad Concept
Includes:
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Physical presence
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Repeated activity
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Agent activities
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Inventory management
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Negotiating or concluding contracts in Canada
2. A PE Does NOT Require Formal Presence
Even without incorporation or leasing property, a foreign company may create a PE through:
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Dependent agents
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Regular visits
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Use of facilities belonging to others
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Repeated commercial presence
3. A Subsidiary Automatically Creates a Taxable Presence
Although not part of this specific ruling, the principles indicate:
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A subsidiary is always a Canadian taxpayer
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A branch exists when PE conditions are met
4. Facts Matter More Than Structure
CRA emphasizes that PE is a question of fact, assessed case-by-case.
Practical Implication for Foreign Businesses
- You may create a branch-equivalent taxable presence even without formally setting up a branch.
- You may trigger T2 filing requirements unintentionally.
- You may owe Canadian tax on profits attributable to Canadian activity.
- Mischaracterizing the presence increases audit risk.
Disclaimer
This summary is based on CRA technical interpretation 2010-038195. CRA positions may change. This content is for informational purposes only and does not constitute legal or tax advice.
Redaction Notice
All confidential information, names, locations, CRA contact details, and internal identifiers have been removed to comply with privacy and publishing requirements.
