The Canadian Federal Court of Appeals recently ruled that a U.S. consultant’s 300 days in Canada in 1994 (and 40 in 1995) did not establish a taxable presence because he had no fixed base in Canada. The consultant was a U.S. citizen that acted as an independent contractor for a Canadian company. The case is controversial in Canada and important for U.S. residents and multinationals.
In what many call a surprising decision, the Canadian Federal Court of Appeals recently ruled that a U.S. consultant did not have a fixed base (i.e., a taxable presence) in Canada. Under the U.S.-Canada Income Tax Convention (the Treaty), the host country does not tax an independent contractor unless his/her work is through a fixed base. The same guidelines determine whether the presence of a U.S. company’s employees on assignment at a Canadian subsidiary establishes a permanent establishment (PE).
The case is controversial in Canada and important for U.S. residents and multinationals when Canadian tax rates are higher. However, as a result of the tax rate differential between the United States and Canada, this decision is unlikely to affect Canadians working in the United States. Canadians working in the US are still taxed in Canada, which, like the United States, taxes its residents on worldwide income, with double taxation mitigated by a credit for foreign income taxes.
Pursuant to Article XIV of the Treaty, an individual who is a resident of one country is not taxed on independent personal services income earned in the other country unless:
he/she has or had a fixed base regularly available, and
the income earned is attributable to the fixed base.
The Treaty also defines a PE as a fixed place of business, through which the business of an enterprise is wholly or partly carried on.
The Canadian Federal Court of Appeals upheld the Canadian Tax Court’s decision in The Queen v. Dudney that a U.S. consultant’s 300 days in Canada in 1994 (and 40 in 1995) did not establish a taxable presence because he had no fixed base in Canada. The consultant was a U.S. citizen that acted as an independent contractor for a Canadian company. While remaining based in Houston, he worked in Canada on a project, with the work being performed on the Canadian company’s premises. For part of the time in Canada he was provided a small room to work in and was subsequently moved to a larger room that he shared with others. He could use the phone, but only for business purposes, and he did not have access to the office outside normal business hours.
The Court found that Mr. Dudney did not have a fixed base in Canada because he did not have a place of business in Canada. The Court also stated that if he did have a place of business in Canada, the facts might have indicated that it was permanent (i.e., fixed).
This taxpayer victory is significant for a couple of reasons:
1. It provides a checklist of factors that indicate the presence or absence of a fixed base that is regularly available.
2. It applies the checklist to determine if the presence of a parent company’s employees have established a PE.
The Bottom Line
When situations arise that are similar to the Dudney case, it may be advantageous for taxpayers to consider taking the position that they do not have a fixed base in Canada or that their employees do not create a PE. However, we believe the tax authorities are unlikely to accept that Dudney accurately reflects the law or will allege that the facts are less supportive of the taxpayer’s position than those in Dudney - an approach the Canadian authorities may eventually take. It should be noted in this regard that the tax authorities have sought leave to appeal the case to the Supreme Court of Canada.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers LLP professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers LLP advisor.
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.
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