Principal Issues
- Whether a U.S. corporation (“USCo”) is carrying on business in Canada.
- Whether USCo has a permanent establishment (“PE”) in Canada under the Canada–U.S. Tax Convention.
- Whether USCo is subject to Canadian income tax on its business profits.
Position
- A non-resident corporation may be considered to be carrying on business in Canada based on the facts and circumstances.
- However, Canadian tax liability arises only where the corporation has a permanent establishment in Canada, subject to treaty provisions.
- The determination of a PE is a question of fact, although certain scenarios may indicate a likely existence of a PE.
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 tax on taxable income earned in Canada, as computed under section 115.
The term “carrying on business in Canada” is extended under section 253, which includes situations where a non-resident:
- solicits orders, or
- offers anything for sale in Canada through an agent or servant,
regardless of where the contract is concluded.
Accordingly, a U.S. corporation with a Canadian employee soliciting sales may be deemed to be carrying on business in Canada.
Under Article VII of the Canada–U.S. Tax Convention, business profits of a U.S. resident are taxable in Canada only if the enterprise carries on business through a permanent establishment in Canada.
Article V of the Convention defines a permanent establishment as a fixed place of business through which the business is wholly or partly carried on.
The determination of a PE generally requires that:
- there is a place of business;
- the place is fixed; and
- the business is carried on through that place.
A PE may also arise in other circumstances, including:
- where a person in Canada has and habitually exercises authority to conclude contracts;
- where services are provided in Canada for 183 days or more under Article V(9);
- where there is a fixed facility, such as an office or warehouse.
In applying these principles:
- Use of independent contractors may not create a PE where they are acting in the ordinary course of business, subject to factual determination.
- Advertising activities or a website alone will generally not create a PE unless supported by a fixed server or physical presence in Canada.
- The presence of a leased office or facility in Canada will generally result in a PE under Article V(2).
Where a permanent establishment exists, Canada may tax the portion of business profits attributable to that PE.
Conversely, where a corporation is carrying on business in Canada but qualifies for a treaty exemption (e.g., activities are preparatory or auxiliary under Article V(6)), it may:
- not be liable for Part I tax, but
- still be required to file a Canadian tax return to claim treaty protection.
Limitations
The determination of whether a U.S. corporation is carrying on business in Canada and whether it has a permanent establishment is highly fact-specific, requiring a comprehensive review of all relevant circumstances.
These comments are general in nature and do not constitute a binding ruling.
Binding confirmation may only be obtained through an advance income tax ruling request submitted in accordance with CRA administrative procedures.
