5.2.2[a] Article V(1) – Definition of Permanent Establishment
Article V (1) provides a general concept of the notion of “permanent establishment” for the purposes of the Treaty.
For a permanent establishment of a U.S. resident to exist each of the following elements comprising in their totality a permanent establishment should be met:
1 – There should be a place of business;
2 - The place of business must be fixed; and
3 – A U.S. Resident should carry on a business, wholly or partially, through that particular fixes place.
Generally, the term “place of business” should be construed broadly as including any premises, facilities or installations, such as machinery or equipment, used for carrying on the business of the enterprise, whether or not such premises or installations are used exclusively for that purpose.
Generally, a non-resident should have a certain degree of control over the premises or equipment used for its business activities.
The requirement that the place of business should be fixed involves a linkage to specific geographic and temporal points.
A permanent establishment will exist only if a business is carried on, wholly or partly, through a particular place of business.
For the purpose of applying Article V, when a non-resident maintains a place of business in Canada and receives income from property, such as dividends, interest, rents or royalties, it is imperative to determine if the non-resident’s activities amount to carrying on a business in which case a particular place would be viewed as a permanent establishment and the non-resident’s net income would be subject to tax in Canada.
A permanent establishment may also result under V (1) through the activities of persons who are in a paid employment relationship with the U.S person, such as employees or dependent agents who carry on the business of the U.S. resident through a fixed place in Canada, regardless of any contractual authority.
5.2.2[b] Article V(2) – Deemed Permanent Establishment
Article V (2) provides that the term “permanent establishment” specifically includes a place of management, a branch, an office, a factory, a workshop; and a mine, oil or gas well, quarry, or any other place of extraction of natural resources.
“Place of management” is not restricted to a formal “place of management” from which the activities of a particular business are directed.
5.2.2[c] Article V(3) – Temporal Rule for Construction / Building / Installation
Article V (3) provides that a building site or construction or installation project constitutes a permanent establishment but only if it lasts more than 12 months.
The rules in Article V (3) should apply on a project-by-project basis. Accordingly, if a U.S. company maintains two construction projects in Canada, the rules in Article V (3) should be applied to each individual project.
The application of Article V (3) is not limited to construction projects, but also may include installation and assembly of machinery or equipment.
5.2.2[d] Article V(4) – Temporal Rule for Natural Resource Drilling Rigs / Ships
Article V (4) provides that the use of an installation or drilling rig or ship in Canada to explore for or exploit natural resources constitutes a permanent establishment but only if such use takes place for more than 3 months in any 12 – month period.
5.2.2[e] Article V(5) – Agency Permanent Establishment
Article V (5) provides that a U.S. resident may acquire a permanent establishment in Canada through activities of an agent if such agent has, and habitually exercises in Canada, an authority to conclude contracts in the name of the U.S. resident.
A determination if a person acts in an agent’s capacity for a U.S. resident person is a question of fact to be decided under Canadian law in light of all facts and circumstances.
There are no judicially pronounced tests for determination as to when a person is “habitually exercising” her authority to negotiate and enter into contracts. The determination of what may constitute “habitually” exercised authority is left to the discretion of the CRA and the courts.
5.2.2[f] Article V(6) – List of Excluded Activities
1 – Using facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident whose business is being carries on;
2 – Maintaining stock of goods or merchandise belonging to the resident for the purpose of storage, display, or delivery;
3 – Maintaining a stock of goods or merchandise belonging to the resident for the purpose of processing by another person;
4 – Purchasing goods or merchandise, or collecting information, for the resident; and
5 – Advertising the supply of information, scientific research, or similar activities of a preparatory or auxiliary character, for the resident.
5.2.2[g] Article V(7) – Independent Agent Exception
Article V (7) provides that a U.S. resident should not be deemed to have a permanent establishment in Canada merely because the U.S. resident carries on a business in Canada through an independent agent, such as a broker or a general commission agent, provided that such an independent agent is acting in the ordinary course of its business.
In determining whether a person is an agent of independent status, the CRA suggested that it would consider the following factors:
1 – Whether the person is independent of the other person both legally and economically;
2 – Whether the person is subject to detailed instructions or to comprehensive control by the other person;
3 – Whether the entrepreneurial risk is borne by the person or the other person the person represents;
4 – Whether the person sells goods in his own name, rather than in the name of the other person;
Whether the person receives title to the goods and bears risk of loss upon delivery;
5 – Whether the person is referred to as an independent contractor rather than as an agent;
6 – Whether the person must pay the other person for goods received, whether the goods are subsequently sold or not;
7 – Whether the person acts as an agent for a couple of other persons or many other persons;
8 – Whether the person has authority to conclude contracts on behalf of the other person.
5.2.2[h] Article V(8) – Exception for Controlled Companies
Article V (8) provides that the fact that a company resident of the U.S. controls or is controlled by a company resident in Canada or which is carrying on a business in Canada, whether through a permanent establishment or otherwise, does not automatically render either company a permanent establishment of the other.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
The Accounting and Tax