2014-0542411R3 Carrying on business in Canada and PE

Principal Issues: (1) Whether the secondment arrangement between a non-resident corporation and a related Canadian corporation causes the non-resident corporation to be considered to render services in Canada for purposes of Regulation 105; (2) Whether the non-resident corporation is carrying on business through a permanent establishment, as defined in Article 5 of the Canada-XXXXXXXXXX Treaty, situated in Canada.

Position: (1) No; (2) No.

Reasons: (1) The conclusion is consistent with our prior positions that the provision of employees by a non-resident corporation under a secondment arrangement, where the non-resident is reimbursed at cost and no mark-up is charged, does not cause the non-resident corporation to be rendering services in Canada for purposes of Regulation 105; (2) The conclusion in respect of the secondment arrangement is consistent with our prior positions that the provision of employees under a secondment arrangement does not cause a non-resident corporation to be carrying on a business in Canada. The subcontracted activities of the non-resident will not meet the permanent establishment threshold in Article 5 of the Canada-XXXXXXXXXX Treaty.

Author: XXXXXXXXXX
Section: Subsection 2(3), section 253, Regulation 105, Article 5 of Canada-XXXXXXXXXX Tax Convention

XXXXXXXXXX                                                               2014-054241

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX
        Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX which contained an advance income tax ruling request on behalf of the above-noted taxpayer. We also acknowledge the additional information provided to us in your emails and phone calls, the last of which was dated XXXXXXXXXX.

The rulings given are based solely on the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information, and any references thereto are provided solely for the convenience of the reader.

We understand that, to the best of your knowledge and that of the above-noted taxpayer involved, none of the issues involved in this advance income tax ruling:

(i)   is in an earlier return of the above-noted taxpayer or a related person;

(ii)  is being considered by a Tax Services Office or Tax Centre in connection with a previously filed tax return of the above-noted taxpayer or a related person;

(iii) is under objection by the above-noted taxpayer or a related person;

(iv)  is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(v)   is the subject of a ruling previously issued by the Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”).

Our understanding of the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions is as follows:

Definitions

The following definitions apply in respect of this advance income tax ruling.  Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require.

(a)   XXXXXXXXXX;

(b)   “CanCo” means XXXXXXXXXX a corporation more fully described in paragraph 3 below;

(c)   “CBCA” means the Canada Business Corporations Act, R.S.C. 1995, c. C-44, as amended;

(d)   “Exchanges” means the XXXXXXXXXX stock exchanges;

(e)   “Foreign Parent” means XXXXXXXXXX a corporation more fully described in paragraph 1 below;

(f)   “ForCo” means XXXXXXXXXX a corporation more fully described in paragraph 2 below;

(g)   “Group” means Foreign Parent and its subsidiaries which, as at XXXXXXXXXX, comprised of XXXXXXXXXX consolidated operating and holding subsidiaries globally, including ForCo and Canco;

(h)   XXXXXXXXXX;

(i)   “Project 1” means XXXXXXXXXX Canadian contracts entered into by CanCo more fully described in paragraph 7 below;

(j)   “Project 2” means XXXXXXXXXX Canadian contracts entered into by CanCo more fully described in paragraph 8 below;

(k)   “Projects” means collectively Project 1 and Project 2, both of which are contracts to be performed by CanCo in Canada more fully described in paragraph 5 and 6 below;

(l)   “Proposed Transactions” means the transactions described in paragraphs 10 to 19 below;

(m)   “Secondment Agreement” means a combination of the Frame Agreement for Supply of Personnel between ForCo and CanCo and the applicable Contract for Secondment between ForCo, CanCo and an employee of ForCo, under which the employee will perform work in Canada for CanCo in connection with the Projects. The Secondment Agreement will contain all requirements and meet all conditions of a secondment agreement described in paragraphs 35 and 37 of Information Circular IC 75-6R2, Required Withholding From Amounts Paid To Non-Residents Providing Services In Canada;

(n)   “Treaty” means the Convention between Canada and XXXXXXXXXX;

(o)   “XXXXXXXXXX Company A” means XXXXXXXXXX, with whom CanCo entered into Project 1;

(p)   “XXXXXXXXXX Company B” means XXXXXXXXXX, with whom CanCo entered into Project 2;

(q)   “XXXXXXXXXX Companies” means XXXXXXXXXX Company A and XXXXXXXXXX Company B; and

(r)   XXXXXXXXXX.

Facts

1.    Foreign Parent is a corporation incorporated in XXXXXXXXXX.  The common shares of Foreign Parent are listed on the Exchanges under the symbol XXXXXXXXXX.  It is the ultimate corporate parent of the Group. Foreign Parent has a XXXXXXXXXX taxation year-end.

2.    ForCo is a corporation resident in XXXXXXXXXX for purposes of the Treaty.  ForCo is controlled indirectly by Foreign Parent. ForCo has a XXXXXXXXXX taxation year-end. ForCo’s address is XXXXXXXXXX.  ForCo’s Tax Services Office is the XXXXXXXXXX Tax Services Office.  ForCo is not a foreign affiliate of CanCo, within the meaning of subsection 95(1), nor is it a direct or indirect parent or subsidiary of CanCo.

3.    CanCo is a taxable Canadian corporation, incorporated under the CBCA, with its head office located in XXXXXXXXXX.  CanCo’s address is XXXXXXXXXX.  CanCo is controlled indirectly by Foreign Parent and is a sister corporation of ForCo. CanCo’s Business Number is XXXXXXXXXX. CanCo has a taxation year end of XXXXXXXXXX. CanCo files its tax returns at XXXXXXXXXX Tax Centre and it deals with the XXXXXXXXXX Tax Services Office.

4.    The Group describes itself as XXXXXXXXXX.

5.    CanCo entered into Project 1 on XXXXXXXXXX with XXXXXXXXXX Company A and Project 2 on XXXXXXXXXX with XXXXXXXXXX Company B.  Each of the XXXXXXXXXX Companies is dealing at arm’s length with CanCo.  The two contracts were signed by CanCo on its own account and not as an agent of any other entity of the Group.

6.    The central point for the Projects is XXXXXXXXXX.

7.    Project 1 will be performed in XXXXXXXXXX.

8.    Project 2 will be performed in XXXXXXXXXX.

9.    XXXXXXXXXX

Proposed Transactions

10.   CanCo, as the main contractor under the Projects, will subcontract some of the Projects’ tasks to ForCo as well as to arm’s length third party subcontractors.

11.   The Projects’ tasks that will be executed by CanCo and the arm’s length third party subcontractors of CanCo are, amongst others: XXXXXXXXXX

12.   In order for CanCo to carry out the tasks described in 11 above, it will require the assistance, in Canada, of a number of ForCo’s employees. Such of ForCo’s employees will be seconded to CanCo under the Secondment Agreement. The obligations of ForCo in respect of the seconded employees will be limited to the provision of such employees to CanCo under the Secondment Agreement, and ForCo will be under no legal obligation to provide services to the XXXXXXXXXX Companies to provide the services that will be provided by the employees seconded by ForCo to CanCo.

13.   It is the intention of ForCo and CanCo to create an employer/employee relationship between CanCo and the seconded employees for the execution of the Projects. Any employees of ForCo coming to Canada under the Secondment Agreement will be under the control and direction of CanCo.  However, for administrative reasons, ForCo’s employees seconded to CanCo will continue to be paid by ForCo. All costs relating to the seconded employees’ remuneration will be reimbursed by CanCo to ForCo.  There will be no mark-up applied by ForCo on this reimbursement.  As such, ForCo will not profit from the secondment of its employees to CanCo under the Secondment Agreement.

14.   The main Projects’ tasks that will be subcontracted to, and executed by, ForCo are: XXXXXXXXXX. None of these tasks will include physical construction activities, installation activities, or on-site planning or supervision of the Projects. XXXXXXXXXX.

15.   The Projects’ tasks to be executed by CanCo will be highly dependent on the Projects’ tasks to be subcontracted to, and executed by, ForCo. For example, ForCo will be in charge of providing XXXXXXXXXX to CanCo.  CanCo’s risks will effectively be limited to the Projects’ tasks it executes where ForCo is not involved. XXXXXXXXXX.

16.   ForCo will not, other than under the Secondment Agreement as described in paragraphs 12 and 13 above, have personnel in Canada for extended periods.  It is expected, however, that from time to time throughout the whole life cycle of the Projects (which is estimated at approximately XXXXXXXXXX, some non-seconded employees of ForCo will come to Canada for XXXXXXXXXX meetings.

17.   The XXXXXXXXXX meetings will be held at CanCo’s office (located outside of the construction/installation site) or at the XXXXXXXXXX premises.  For greater certainty, the non-seconded employees of ForCo coming to Canada for XXXXXXXXXX meetings will not have any presence at the construction/installation site at all, and therefore, will not be involved in the construction/installation activities at the site, nor will they be involved in the on-site planning or supervision of the Projects. XXXXXXXXXX.

18.   The XXXXXXXXXX meetings will typically last for a few days only and, exceptionally, up to a few weeks.  The frequency and duration of the meetings will vary, but in any event, will never exceed an aggregate of 90 days over any 12 month period.  As a result, the total amount of time to be spent by the non-seconded employees of ForCo in Canada in the course of ForCo’s work for the Projects will be insignificant relative to the total amount of time spent by ForCo for the Projects.  Similarly, the functions performed by the non-seconded employees of ForCo in Canada will be insignificant relative to the overall functions performed by ForCo in respect of the Projects. 

19.   Since the visits of ForCo’s non-seconded employees to Canada as described in paragraphs 16 to 18 above may potentially amount to ForCo being viewed as carrying on business in Canada and providing services in Canada, the withholding requirements under section 105 of the Income Tax Regulations (the “Regulations”) and any relevant filing requirements under the Act and the Regulations will be complied with as required.

Purpose of the Proposed Transactions

20.   In light of ForCo having the relevant experiences for projects similar to the Projects, the purpose of the proposed transactions is to facilitate the provision of the employees of ForCo to CanCo under the Secondment Agreement in order for CanCo to perform its obligations under the Projects, and also to structure the subcontracting to ForCo of parts of the Projects, entered into by CanCo.

Additional Information

21.   CanCo, as opposed to ForCo, entered into the Projects as the main contractor because it was commercially the most effective way of doing business in Canada. CanCo has the knowledge about the local market and the best customer contacts. Also the Canadian customers prefer doing business with local suppliers. It was thanks to this that CanCo won these two contracts and the portions they couldn’t deliver themselves were subcontracted to ForCo.

22.   Transfer prices for transactions between CanCo and ForCo will be determined in accordance with the arm’s length principle reflecting the functions and risks of both parties and will be supported by proper documentation.

23.   The allocation of the Projects’ risks between CanCo and ForCo as described in paragraph 15 above may result in ForCo effectively assuming most of the risks that could arise from the Projects. This would be consistent with the economic reality of ForCo having the financial capacity to bear risk.

24.   ForCo does not and will not have an office, branch, place of management or any premises at its disposal in Canada in respect of the Projects.  ForCo will not have designated phone lines, signage or any other physical indications that would create any degree of identification of a location in Canada as ForCo’s business location.

25.   ForCo will not hire and send subcontractors to perform work in Canada in respect of the Projects.

26.   ForCo will not have a person in Canada acting on behalf of ForCo who will have and habitually exercise, in Canada, an authority to conclude contracts in the name of ForCo.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:

A.    Section 105 of the Income Tax Regulations will not apply to require Canco to withhold any portion of a payment made to ForCo in respect of the secondment under the Secondment Agreement of certain employees of ForCo, as described in paragraphs 12 and 13 above, to work for CanCo in Canada in respect of the Projects.

B.    ForCo will not be considered to carry on business through a permanent establishment, as defined in Article 5 of the Treaty, situated in Canada solely as a consequence of the secondment under the Secondment Agreement of certain employees of ForCo to work for CanCo in Canada in respect of the Projects, as described in paragraphs 12 and 13 above, or the Projects’ tasks subcontracted to, and executed by, ForCo, as described in paragraphs 14 to 18 above.

Comments

The above rulings are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed prior to XXXXXXXXXX, however, they are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014. For example, and without limiting the generality of the foregoing, as noted in paragraph 17 and 18 of IC 70-6R6:

16. If legislation is amended after a Ruling is issued and the Ruling ceases to be supported by the legislation due to the amendment(s), the Ruling will cease to bind the CRA on the effective date of the amendment.

17. If a court decision is rendered after a Ruling is issued and the court decision stands for a proposition that cannot be reconciled with an interpretation of the legislation on which the Ruling is based, the Ruling will cease to bind the CRA in respect of transactions occurring after the date of the court decision.

The above rulings given are based solely on the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions described above. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions, and Additional Information and any references thereto are provided solely for the convenience of the reader.  Nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions and Additional Information described herein other than those specifically described in the Rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

*     any issues concerning whether ForCo carries on business in Canada or has a permanent establishment in Canada for reasons other than those listed in the Rulings above; 

*     any issues concerning the residency of ForCo;

*     any issues concerning transfer prices for transactions between CanCo and ForCo;

*     any issues concerning the allocation of the Projects’ risks as between CanCo and ForCo; and

*     the GST implications of any of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Brancht

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