Principal Issues
Position
The determination of whether a non-resident corporation is carrying on business in Canada and whether a permanent establishment exists is a question of fact.
Where a non-resident carries on business in Canada, it may be subject to Canadian income tax on taxable income earned in Canada.
Where a permanent establishment exists in Canada, business profits attributable to that permanent establishment are taxable in Canada.
Reasons
Pursuant to paragraph 2(3)(b) of the Income Tax Act (the “Act”), a non-resident person who carries on business in Canada is liable to pay Canadian income tax on taxable income earned in Canada.
The determination of whether a non-resident is carrying on business in Canada is a question of fact and is based on common law principles and statutory extensions, including paragraph 253(b) of the Act, which provides that a non-resident who solicits orders or offers anything for sale in Canada through an agent or servant may be considered to be carrying on business in Canada.
Under the Canada–U.S. Tax Convention, business profits of a U.S. resident are generally taxable only in the United States unless the enterprise carries on business in Canada through a permanent establishment situated in Canada.
Article V of the Convention defines “permanent establishment” as a fixed place of business through which the business of an enterprise is wholly or partly carried on. This includes, inter alia, an office or other fixed place of business.
The determination of a permanent establishment generally requires that:
- there is a place of business;
- the place of business is fixed; and
- the business of the enterprise is carried on through that place.
A permanent establishment may also be deemed to exist where a person in Canada has and habitually exercises authority to conclude contracts on behalf of the non-resident enterprise.
Where services are provided in Canada, a permanent establishment may be deemed to exist where services are performed in Canada for an aggregate of 183 days or more in a twelve-month period, subject to the conditions set out in Article V.
The use of independent agents acting in the ordinary course of their business may not, in itself, result in a permanent establishment, provided such agents are legally and economically independent.
However, where a non-resident maintains a fixed place of business in Canada, including leased premises used as an office or for inventory, such presence would generally constitute a permanent establishment.
Advertising activities or the use of a website, in and of themselves, will not generally create a permanent establishment unless supported by a fixed place of business, such as a server located in Canada at the disposal of the enterprise.
