How much can non-residents carrying on a business "do"
in Canada without being subject to Canadian income tax on the
related business income (and having to file a Canadian tax return)?
It's easy to inadvertently cross the line. A recent advance tax
ruling issued by the Canada Revenue Agency (CRA) helps to
illustrate some of the important boundaries that non-residents with
Canadian business activities should be aware of in order to
minimize the risk of being subject to Canadian income tax.
For non-residents who are resident in a country that has an
income tax treaty with Canada, the basic rule is that the
non-resident will become taxable on income earned in Canada when
the non-resident can be said to carry on business in Canada through
a "permanent establishment" (PE) located in Canada. While
the PE definition varies somewhat from treaty to treaty (in
particular the Canada-U.S. treaty has some special rules), in
general terms a PE is created by the non-resident having a physical
presence in Canada, i.e., either (1) employees or a non-independent
agent in Canada who enter into contracts on the non-resident's
behalf, or (2) office space or other place of business in
A non-resident typically will want to structure its affairs to
avoid having a Canadian PE if at all possible.
A common situation where non-residents run into trouble is when
they have a Canadian subsidiary. The danger is that the Canadian
subsidiary either (1) is treated as the non-resident's agent
because the Canadian subsidiary performs functions as part of the
non-resident's business, or (2) has premises in Canada that are
treated as the non-resident's fixed place of business because
the non-resident has the use of part of those premises for
significant periods of time (e.g., visiting employees of the
In the recent advance tax ruling issued by the CRA, Foreign
Parent carried on a manufacturing and distribution business that
involved sales to an arm's-length Canadian customer
Foreign Parent entered into a Services Agreement with its
wholly-owned Canadian subsidiary (Cansub) to have Cansub assemble
(and in some cases manufacture) and deliver the parts Foreign
Parent sold to CanClient (as these activities could be done more
efficiently in Canada). Foreign Parent frequently had employees in
Canada supervising Cansub personnel or dealing with CanClient. By
very carefully structuring its arrangements, Foreign Parent was
able to get the CRA to rule that these activities would
not result in Foreign Parent carrying on business in
Canada through a Canadian PE.
Foreign Parent made sure that its agreements with Cansub
identified Cansub as an independent contractor engaged in its own
business, i.e., not Foreign Parent's agent acting as part of
Foreign Parent's business.
These agreements made clear that Cansub did not have authority
to receive orders, negotiate with customers, or conclude contracts
on behalf of Foreign Parent, or assume any obligation on behalf of
Foreign Parent. They also made clear that Cansub would not hold
itself out as an agent, a representative or a partner of Foreign
Critically, Foreign Parent ensured that it would not have its
employees physically present in Canada for more than 90 days in any
12-month period, and that in the event that it became necessary to
have someone physically in Canada for more than 90 days such
persons would be formally seconded to Cansub. This very likely
allowed the CRA to conclude that whatever physical presence Foreign
Parent had in Canada did not have a sufficient degree of permanence
to rise to the level of a "permanent establishment".
Foreign Parent did not own or lease any real property in
Canada, and steps were taken to ensure that no specific portion of
Cansub's facilities were identifiable as Foreign Parent's
business location or reserved exclusively for use of visiting
Foreign Parent employees.
While this ruling does not create hard-and-fast benchmarks that
necessarily govern in all circumstances (particularly as each tax
treaty is somewhat different), it identifies some of the key things
that non-residents with Canadian subsidiaries and clients can do to
minimize the risk of being taxable in Canada. Please contact a
member of the Tax Group if you would like more information about
this advance tax ruling (CRA document 2011-0396421R3) or its
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