Permanent Establishment

Pursuant to paragraph 2(3)(b) of the Income Tax Act, a non-resident person who carries on business in Canada is liable to Canadian income tax on taxable income earned in Canada, as computed under section 115.

However, 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.

Paragraph 1 of Article V defines a permanent establishment as a fixed place of business through which the business of the enterprise is wholly or partly carried on.

The determination of whether a permanent establishment exists is a question of fact, requiring a review of all relevant circumstances, including whether:

• there is a place of business,
• the place is fixed, and
• the business is carried on through that place.

Based on the facts provided:

• USCo has no property or physical presence in Canada,
• employees work remotely and are free to choose their work location,
• employees do not have authority to conclude contracts, and
• employees do not solicit business or make offers on behalf of USCo.

In such circumstances, it is unlikely that a permanent establishment exists under paragraphs 1 to 5 of Article V.

However, paragraph 9 of Article V provides that a permanent establishment may be deemed to exist where services are performed in Canada for 183 days or more in any twelve-month period, subject to additional conditions relating to revenue thresholds or connected projects.

The application of paragraph 9 requires a detailed factual analysis, including the duration of services and whether services are provided in respect of the same or connected projects.

Accordingly, while a permanent establishment is unlikely under the fixed place of business test, it cannot be conclusively determined whether a permanent establishment exists under the services PE rules without further information.