13 April 2011 External T.I. 2010-0391541E5 - Article V (9) of the Canada-US Tax Convention

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether Article V (9)(b) of the Treaty will apply to deem USco1 or USco2 to have a permanent establishment in Canada in respect of services provided to a customer described in that subparagraph.

Position: Yes

Reasons: Article V (9)(b) of the Treaty deems an enterprise to have a permanent establishment in Canada, if they provide services for more than 183 days in Canada.

XXXXXXXXXX
			J. Nichols
			2010-039154

April 13, 2011

Dear XXXXXXXXXX :

Re: Article V (9)(b) of the Canada-US Tax Convention (the "Treaty")

We are writing in reply to your letter dated December 21, 2010, requesting our assistance in determining whether Article V (9)(b) of the Treaty will apply to deem USco1 or USco2 to have a permanent establishment in Canada in the following hypothetical fact scenario. USco1 entered into a contract to provide services to Canco, a customer resident in Canada. USco1 engaged USco2 to provide the services that USco1 was obligated to provide under the contract with Canco, on behalf of USco1 for Canco. The services are provided over a period more than 183 consecutive days. USco1 and USco2 are not residents of Canada; they are residents of the United States for the purposes of the Treaty and are not denied the benefits of the Treaty by Article XXIX-A thereof. Many employees of USco2 will be involved in performing these consulting services. Canco, USco1 and USco2 are controlled by a common parent company.

Our comments

Article V (9)(b) of the Treaty reads as follows:

9. Subject to paragraph 3, where an enterprise of a Contracting State provides services in the other Contracting State, if that enterprise is found not to have a permanent establishment in that other State by virtue of the preceding paragraphs of this Article, that enterprise shall be deemed to provide those services through a permanent establishment in that other State if and only if:

(a)...
(b) The services are provided in that other State for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected project for customers who are either residents of that other State or who maintain a permanent establishment in that other State and the services are provided in respect of that permanent establishment.

In your fact scenario, it is our view that USco1 "provided" consulting services to Canco, a customer resident in Canada. USco1 "provided" these services to Canco, through the agency of USco2. USco1 would be deemed to have a PE in Canada under Article V (9)(b) of the Treaty as USco1 provided services to a customer resident in Canada (i.e. Canco) for more than 183 days in a twelve month period with respect to a single project.

USco2 would also be deemed to have a PE in Canada under Article V (9)(b) of the Treaty. USco2 provided services in Canada for more than 183 days in a twelve month period to a customer (i.e. USco1) that is deemed to have a PE in Canada, with respect to a single project.

In cases where paragraph 9 of Article V of the Treaty have been circumvented the provisions of subsection 245(2) General Anti-Avoidance Rule (GAAR) would be considered.

As noted in paragraph 22 of the Information Circular 70-6R, this opinion is not an advanced income tax ruling and consequently is not binding on the Canada Revenue Agency.

We trust our comments will be of assistance.

Yours truly,

Olli Laurikainen
Manager
International Section II
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch