2014-0550611R3 Permanent Establishment

Principal Issues: Whether a particular non-resident corporation will be considered to be carrying on business in Canada through a permanent establishment in Canada as a result of the corporation having hired a Canadian resident employee to provide services from his home in Canada.

Position: No.

Reasons: Determinations as to whether a non-resident person carries on business in Canada through a permanent establishment in Canada is a question of fact; however, based on the facts as submitted, we are of the view that the hiring of a Canadian resident employee, in and of itself, will not cause the non-resident person in question to be considered to be carrying on business in Canada through a permanent establishment.

Author: XXXXXXXXXX
Section: Article V of the Canada-US Treaty

XXXXXXXXXX                                                              2014-055061

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
         XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-named taxpayer.  We also acknowledge the additional information provided to us in your emails and telephone conversations, the last of which was dated XXXXXXXXXX.

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

(i)   in an earlier tax return of the taxpayer or a related person;

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

(iii) under objection by the taxpayer or a related person;

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

(v)   the subject of a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person.

This document is based solely on the Facts, Proposed Transactions, Additional Information, and Purpose of 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.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), 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)   “Employee” means the employee of ForCo, more fully described in paragraph 9 below;

(b)   “Employment Agreement” means the agreement entered into by and between Employee and ForCo on XXXXXXXXXX which establishes the employee/employer relationship between them;

(c)   “ForCo” means XXXXXXXXXX, a corporation more fully described in paragraph 4 below;

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

(e)   “Master Agreement” means the agreement entered into by and between Foreign Parent and a Member, more fully described in paragraph 2 below;

(f)   “Member” means a corporation or other type of entity that has entered into a Master Agreement with Foreign Parent;

(g)   “Proposed Transactions” means the transactions described in paragraphs 11 to 14 below;

(h)   “Service Contract” means the contract entered into by and between Foreign Parent and ForCo on XXXXXXXXXX for the provision of services in Canada by ForCo in respect of the Canadian Members of Foreign Parent, more fully described in paragraph 6 below;

(i)   “Service Fee” means the fees payable by Foreign Parent to ForCo as consideration for services rendered by ForCo under the Service Contract; and

(j)   “Treaty” means the Canada-U.S. Tax Convention (1980), as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007.

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

Facts

1.    Foreign Parent is a non-profit organization organized and existing under the laws of XXXXXXXXXX in the U.S. with its head office in XXXXXXXXXX. Foreign Parent is exempt from federal income tax in the U.S. as a XXXXXXXXXX organization under section 501(c)(3) of the Internal Revenue Code.  Foreign Parent is a resident of the U.S. for the purposes of the Treaty and exempt from Canadian income tax pursuant to Article XXI of the Treaty.

2.    Foreign Parent’s principal activity is to XXXXXXXXXX. Foreign Parent funds its XXXXXXXXXX through selling memberships, which currently includes an active Canadian membership base of approximately XXXXXXXXXX Members.  Members are entitled to attend Foreign Parent’s meetings, advise on the direction of Foreign Parent’s XXXXXXXXXX and obtain access to the XXXXXXXXXX performed by Foreign Parent.  Each Member is subject to a Master Agreement. Foreign Parent has no obligation to provide any XXXXXXXXXX or other services to individual Members as part of their membership. For greater certainty, Foreign Parent does not and will not perform any services for Members in Canada, either directly or through a subcontractor.

3.    Foreign Parent has no physical presence in Canada – it has no directors, officers, employees in Canada; it has no offices situated in Canada or any premises otherwise available to Foreign Parent in Canada. Occasionally, Foreign Parent’s U.S.-based employees travel to Canada to meet with Members or prospective Members; XXXXXXXXXX. No Master Agreements or other contracts are negotiated or concluded in Canada during such visits. In addition, Foreign Parent’s U.S.-based employees on occasions attend conferences in Canada.  Foreign Parent does not carry on business in Canada through a permanent establishment, as that term is defined in Article V of the Treaty, situated in Canada.

4.    ForCo is a wholly-owned subsidiary of Foreign Parent. ForCo is a corporation organized and existing under the laws of XXXXXXXXXX in the U.S.  ForCo is resident of the U.S. for purposes of the Treaty and entitled to benefits under the Treaty pursuant to Article XXIX-A of the Treaty. ForCo has its office located at XXXXXXXXXX.  To date, no corporate income tax returns have been filed in Canada on behalf of ForCo. 

5.    ForCo’s business is to assist Foreign Parent in selling memberships described in paragraph 2 above to potential Members and to provide services to Foreign Parent in respect of its current and prospective worldwide Members.

6.    Foreign Parent and ForCo entered into the Service Contract to service Foreign Parent’s Canadian Members and to search for potential Canadian Members. The Service Contract outlines the particular services that fall within the scope of the activities to be performed by ForCo to include:

a)    providing XXXXXXXXXX services about XXXXXXXXXX and collecting relevant information for Foreign Parent,

b)    acting as an intermediary and assisting with all communications between Foreign Parent and its Canadian Members and potential Members,

c)    supporting Foreign Parent’s operations by handling operational complaints and determining impact, if any, on Foreign Parent’s XXXXXXXXXX activities, and

d)    providing Foreign Parent with general support services as it relates to its Canadian Members.

7.    Services provided to Foreign Parent by ForCo under the Service Contract will generally be rendered in Canada; therefore, ForCo will be carrying on its business in Canada for purposes of the Act.

8.    The Service Contract specifically states that services provided by ForCo shall not include negotiating and/or signing of Master Agreements or other contracts for the selling of Foreign Parent’s products or services. In addition, ForCo is not permitted to conclude XXXXXXXXXX service contracts on behalf of Foreign Parent.  Foreign Parent and potential Members negotiate and conclude Master Agreements and other contracts directly with each other.

9.    To fulfill ForCo’s obligations under the Service Contract, ForCo hired Employee on a full-time basis to work under the Employment Agreement from a home office in XXXXXXXXXX. Employee is the first and only Canadian resident employee to be hired by ForCo. 

10.   Other than the hiring of Employee in Canada, ForCo has no other presence in Canada – it has no directors, officers, employees in Canada; it has no offices situated in Canada or any premises otherwise available to ForCo in Canada.  Occasionally, ForCo’s U.S.-based employees travel to Canada for meetings with Members or prospective Members; XXXXXXXXXX.  In addition, ForCo’s U.S.-based employees on occasion attend conferences in Canada.

Proposed Transactions

11.   Employee will perform his functions under the Employment Agreement, which will include communicating with Foreign Parent’s existing Canadian Members and identifying potential new Canadian Members to Foreign Parent. More specifically, the duties and responsibility of Employee will be as follows:

a)    developing and maintaining contact with Members and potential Members,

b)    supporting Foreign Parent in providing customer liaison and market analysis,

c)    acting as Foreign Parent’s lead in working with the XXXXXXXXXX staff,

d)    developing industry contacts and network within the regions,

e)    supporting Foreign Parent in liaising with Members in relation to membership benefits, and

f)    co-ordinating effective integration of marketing activities.

12.   Employee will have no authority to conclude contracts on behalf of ForCo or Foreign Parent. Potential Members will be made aware that all negotiations in relation to any contracts between potential Members and Foreign Parent will be conducted between such parties directly.

13.   Employee’s home office is not associated or identified with the business of ForCo or Foreign Parent in any manner nor does ForCo have access to, or control over, the home office at any time. ForCo will not assume any costs or risks associated with Employee`s home office.  ForCo will reimburse Employee for computer-related expenses only; no other costs associated with the home office will be reimbursed. In addition, ForCo will reimburse Employee for travel and other out-of-pocket expenses related to services under the Employment Agreement.

14.   Foreign Parent will pay the Service Fee to ForCo on an annual basis computed and paid in accordance with the Service Contract. In any twelve-month period, the Service Fee will amount to less than XXXXXXXXXX% of ForCo’s worldwide gross active business revenues. 

Additional Information

15.   In addition to Master Agreements with Members, Foreign Parent may engage in XXXXXXXXXX and a limited number of other miscellaneous arrangements with Members based on separate contracts (“billable services agreements”) entered into with individual Members.

16.   Both Foreign Parent and ForCo have used services of an independent contractor, a Canadian resident corporation, to provide consulting services in Canada to Foreign Parent or ForCo, respectively, on a XXXXXXXXXX matter for a limited time.

Purpose of the Proposed Transactions

17.   Through the Service Contract, Foreign Parent will ensure better communication with its existing Canadian Members while identifying possible new Members within Canada to enlarge its membership base so as to provide a stable funding platform for its XXXXXXXXXX.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information, and the Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are completed in the manner described above, and there are no other transactions that may be relevant to the ruling given, we rule as follows:

A.    ForCo will not be considered to carry on business through a permanent establishment, as defined in Article V of the Treaty, situated in Canada, solely as a consequence of the activities of Employee performed in Canada as described in the Proposed Transactions.

Comments

The above Ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and is binding on the CRA provided that Employee starts performing his duties, as described in the Proposed Transactions, prior to XXXXXXXXXX.

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 Ruling given above and in particular, without limiting the generality of the foregoing, in respect of:

a) any issues concerning the residency of ForCo and Foreign Parent and their eligibility for the benefits of the Treaty under Articles XXI and XXIX-A;

b)    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 Ruling above;

c)    any issues concerning whether Foreign Parent carries on business in Canada, has a permanent establishment in Canada, or provides services in Canada either directly or indirectly, through ForCo or other subcontractors, including any consequences arising from the billable services agreements described in paragraph 15 above;

d)    any issues concerning the transfer pricing practices in respect of the Service Fee or any tax consequences of the Proposed Transactions where, in any twelve-month period, the Service Fee will amount to more than XXXXXXXXXX% of ForCo’s worldwide gross active business revenues;

e)    any tax compliance issues or Regulation 105 withholding requirements arising from the activities of Foreign Parent or ForCo; and

f)    the GST implications of any of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
Manager
for Division Director
International Division
Income Tax Rulings Directorate

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