Generally, Article VII provides that the business profits of a person resident in one Contracting State should not be taxable in the other Contracting State unless the particular person carries or has carried on a business through a permanent establishment situated in the source State.
The attribution of profits to a permanent establishment should be based on the assumption that the particular permanent establishment is a fictitious distinct and separate person (i) engaged in the same or similar activities under the similar conditions; and (ii) dealing at arm’s length with its home office in the Residence State and other related persons.
Article VII also imports the transfer pricing principles into the allocation of expenses and other deductions incurred by or for the purposes of a permanent establishment.
The business profits of a permanent establishment that are subject to tax in the source State should be computed and reported in accordance with the laws of the source State.
Where a person resident in the Residence State derives income from the source State, but the income is not derived through a permanent establishment in the source State, the person should consider whether the income is of a type that is dealt with under another provision of the Treaty
References:
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
