Post by Penny Spiro on Apr 29, 2009 2:02:47 GMT 4
Canada: CRA interprets new service permanent establishment rules
The fifth protocol to the Canada–US income tax convention introduced a new provision, with delayed effect, which generally deems a US resident that provides services in Canada to Canadian customers with respect to a single project or several connected projects for 183 days or more in any twelve-month period to provide such services through a permanent establishment (PE) in Canada.
According to the US technical explanation of the protocol, this provision applies only to services provided to third parties, and therefore would not deem a particular enterprise to have a service PE merely because services are provided to that enterprise. The explanation of the protocol prepared by the US joint committee on taxation goes even further, stating that the provision does not apply to intercompany services.
The Canada Revenue Agency (CRA) however, recently released an interpretation of the term third party, which would allow broader application of the service PE rule than was originally anticipated. According to CRA, a third party in this context means any person other than the person operating the enterprise in question and includes a related person. Under this interpretation, a US affiliate within a multinational group could be deemed to have a service PE in Canada if it performs services for a Canadian affiliate within the group. This interpretation appears to contradict the joint committee explanation.
Depending on the facts of each case, it may still be possible to argue that, even if inter-company services are provided continuously by a US resident to a Canadian affiliate, they are not provided in Canada for 183 days or more with respect to a single project or several connected projects.
Kathleen Penny (kathleen.penny@blakes.com) and Andrew Spiro (andrew.spiro@blakes.com), Toronto
The fifth protocol to the Canada–US income tax convention introduced a new provision, with delayed effect, which generally deems a US resident that provides services in Canada to Canadian customers with respect to a single project or several connected projects for 183 days or more in any twelve-month period to provide such services through a permanent establishment (PE) in Canada.
According to the US technical explanation of the protocol, this provision applies only to services provided to third parties, and therefore would not deem a particular enterprise to have a service PE merely because services are provided to that enterprise. The explanation of the protocol prepared by the US joint committee on taxation goes even further, stating that the provision does not apply to intercompany services.
The Canada Revenue Agency (CRA) however, recently released an interpretation of the term third party, which would allow broader application of the service PE rule than was originally anticipated. According to CRA, a third party in this context means any person other than the person operating the enterprise in question and includes a related person. Under this interpretation, a US affiliate within a multinational group could be deemed to have a service PE in Canada if it performs services for a Canadian affiliate within the group. This interpretation appears to contradict the joint committee explanation.
Depending on the facts of each case, it may still be possible to argue that, even if inter-company services are provided continuously by a US resident to a Canadian affiliate, they are not provided in Canada for 183 days or more with respect to a single project or several connected projects.
Kathleen Penny (kathleen.penny@blakes.com) and Andrew Spiro (andrew.spiro@blakes.com), Toronto