Canada: Taxation Law @ Gowlings: September 20, 2010

Last Updated: September 22 2010
Article by Colleen McMullin


  • Canada Revenue Agency's Interpretation of: "Permanent Establishment"
  • Taxand News - access Taxand's Take for the latest tax issues affecting multinationals worldwide as well as Taxand's latest range of publications.

Canada Revenue Agency's Interpretation of: "Permanent Establishment"

Under the Canada-U.S. Income Tax Convention (the "Treaty"), a corporation resident in the United States may be taxed in Canada where its activities give rise to a "permanent establishment".  

If a U.S. corporation is deemed to have a permanent establishment in Canada, the U.S. corporation will be subject to Canadian tax return filing obligations and will be required to pay tax to the Canada Revenue Agency ("CRA") on business profits attributable to that permanent establishment.

A permanent establishment is generally defined to include either a fixed place of business (e.g. an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the U.S. corporation.  Furthermore, a recent addition (effective January 1, 2010) to the Treaty provides that a U.S. corporation may be deemed to have a Canadian permanent establishment if it either:

(a) performs services in Canada through an individual present in Canada for an aggregate of 183 days or more in any given twelve-month period and during that period more than 50% of the gross active business revenues of the enterprise consists of income derived from services performed in Canada by that individual, or

(b) provides services in Canada for an aggregate of 183 days or more in any given twelve-month period with respect to the same or connected projects for Canadian customers.  

Whether a permanent establishment exists is a question of fact, thus its meaning changes from one industry and activity to another.  Recent case law1 has offered some guidance as to how the CRA and the courts may interpret the definition of permanent establishment from the Treaty.

Fixed Place of Business Analysis:

When ascertaining whether a permanent establishment exists, the CRA will first conduct an analysis to determine whether the U.S. resident meets the "fixed place of business" definition of permanent establishment.

The Tax Court of Canada has offered the following guidelines to be employed when conducting a "fixed place of business analysis"2:

1.   The existence of a place of business ;

The term "place of business" covers any premises or facilities used to carry on the business of the U.S. resident, whether they are used exclusively by the U.S. resident for that purpose or not.  To establish that a place of business exists, the CRA will look to whether the U.S. resident has space at its disposal or whether an employee of the U.S. resident is allowed to use an office in a place of business of another company for a long period of time. 

No formal right to use a particular place is required and the premises in question do not have to be used exclusively by the U.S. resident.   

2.  A degree of permanence to such place ;

In order to determine whether a place of business is a permanent establishment, the CRA will look at the duration of the activities of a U.S. resident at a particular place in Canada.  It will also consider whether its presence at the place is recurring.  If the nature of the activities is such that the activities are often moved between neighbouring locations, the CRA will attempt to determine whether those locations constitute a single geographic or commercial whole, and therefore, one single place of business to which the duration test can be applied.  A coherent whole could be established where the activities are carried on within a limited geographic area or where there is a series of related contracts (e.g. with the same client, or for the same entity). 

A place of business may constitute a permanent establishment even though it exists only for a short period of time, if the nature of the business is such that it will only be carried on for that short period of time.  Temporary interruptions of activities do not cause a permanent establishment to cease to exist.  If the U.S. resident's operations are carried out on a regular basis, this is an indication of the existence of a permanent establishment.

3.  The business of the U.S. resident must be wholly or partly carried on through this fixed place of business .

To determine if a U.S. resident's business is being carried on from a fixed place of business, the following non-exhaustive list of factors should be considered:

  • whether the activities are carried out on a regular basis and the importance of the business activities as a whole to the U.S. resident;
  • the scale of the activities carried on in Canada in terms of investment, number of employees and/or equipment deployed at the place of business in Canada;
  • use of, control, and/or legal right to control the premises by the U.S. resident;
  • who made management decisions regarding the premises and who bore the risks of the operation;
  • whether the U.S. resident had any Canadian employees at the premises

Whether the U.S. resident's business is carried on at the premises also depends upon whether the place is "at the disposal" of the enterprise. This could be satisfied as easily as the U.S. resident paying for the expenses in connection with the premises, requiring that that premises contain certain items, or even using the premises to interact with clients.

Dependent Agent Permanent Establishment Analysis:

If a U.S. resident does not meet the criteria established in the test for a "fixed place of business", the CRA will attempt to determine whether a "dependent agent permanent establishment" exists.

In order for a U.S. resident to have a permanent establishment through a "dependent agent", there must be a person within Canada who habitually exercises the authority to conclude contracts on behalf of the U.S. resident.  Dependent agents may be individuals or companies and need not be residents of, nor have a place of business in the country in which they act.

The authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the U.S. resident.  A person who is authorized to negotiate all elements and details of a contract in a way that is binding on the U.S. resident can be said to exercise this authority in Canada, even if the contract is signed by another person in the United States, or if the first person has not formally been given the power of representation.

Recent case law3 has demonstrated that in cases where the terms of the contract have been set in the United States and an agent simply presented the terms to potential customers in Canada, no real negotiation takes place if the agent does not have the authority to contract on behalf of the U.S. resident. Further, there will be no dependent agent permanent establishment if the agent is engaged solely in certain activities which have a preparatory or auxiliary character.

Agents who are both legally and economically independent, and who are operating in the ordinary course of their own business, will not contribute to the formation of a permanent establishment.   Whether an agent is independent depends upon the extent of the obligations that the agent has vis-ŕ-vis the U.S. resident.

Persons cannot be said to act in the ordinary course of their own business if, in place of the U.S. resident, such persons perform activities which, economically, belong to the sphere of the U.S. resident rather than to that of their own business operations.

Case law has noted4 that all facts and circumstances must be taken into account to determine whether an agent's activities constitute autonomous business conducted by him or her in which he bears the risk and receives the reward through the use of his entrepreneurial skills and knowledge.


In making a determination of whether or not a permanent establishment exists, there are numerous factors to be considered.  Which factors are most relevant in any particular case will be largely dependent upon the nature of the taxpayer's business and the particular facts and circumstances in question.  Before any determination is made, all facts of a particular case must be analyzed.


1. Knights of Columbus v. R. 2008 TCC 307, American Income Life Insurance Co. v. R. 2008 TCC 306.

2. American Income Life Insurance Co. v. R. 2008 TCC 306 at para 47.

3. Knights of Columbus v. R. 2008 TCC 307.

4. American Income Life Insurance Co. v. R. TCC 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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