1. Canada’s typical income tax treaty -

1. Canada’s typical income tax treaty

The definition of a “permanent establishment” under Canada’s tax treaties is generally predicated upon any of: (i) a place; (ii) a person; or, (iii) in the case of Canada’s treaties with China and the U.S., the amount of time spent in Canada.

(a) Places

A permanent establishment as a place means a “fixed place of business”; that is, a physical location controlled by, and identifiable by prospective clients with, the non-resident taxpayer. Aside from owning or leasing space, the taxpayer may have a permanent establishment if it is permitted to use the office of a subsidiary or a client. Factors to be considered include but are not limited to whether the taxpayer has a key to the premises and access at any hour, whether it uses the premises of one client to service other clients and whether it hangs its own shingle in the lobby or hands out business cards with the address or phone number of those premises.

The Canada Revenue Agency has, in the past, determined that the premises of a subsidiary were a fixed place of business of its non-resident parent. The argument is that the subsidiary, although it is a separate legal entity, is merely the agent of the non-resident. The following may be helpful in avoiding this situation:

  • agreements between the non-resident taxpayer and any Canadian subsidiary should be clear that the subsidiary is an independent third party engaged in its own business, not the non-resident taxpayer’s agent acting as part of the non-resident taxpayer’s business; and
  • these agreements should make it clear that the Canadian subsidiary does not have the authority to receive orders, negotiate with clients or conclude contracts on behalf of the non-resident taxpayer, or assume any obligation on behalf of the non-resident taxpayer; they should also make clear that the Canadian subsidiary cannot hold itself out as an agent, a representative or a partner of the non-resident parent.

(b) Persons

The second concept is that of a permanent establishment as a person. A person can be a permanent establishment if it has and habitually exercises in Canada the authority to contract on behalf of the non-resident taxpayer. If circumstances permit, this situation can be avoided simply by denying any person in Canada the authority to execute contracts on the non-resident taxpayer’s behalf.

(c) Modifying Rules

The rules relating to places and persons are typically modified by supplementary rules. There are, for example, a series of exclusions pertaining to the purchase or storage of merchandise and activities of a preparatory or auxiliary character. Canada’s treaties generally also exclude from the definition of “permanent establishment” building sites, assembly and installation projects provided that such site, project or activity does not last more than twelve months—six months in the case of China or Hong Kong.


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