As a general rule, a U.S. resident carrying on business in Canada will be exempt from Canadian income tax on any profits from that business unless there is a “permanent establishment” (“PE”) in Canada. This is provided in Article VII(1) of the Canada-U.S. Tax Convention (“the Treaty”).
There are exceptions to this general rule. The most notable being in connection with athletes and entertainers (see Article XVI of the Treaty).
However, in the typical situation, if there is no Canadian PE, there is no Canadian tax obligation, although, in the case of U.S. corporations, there still may be a filing obligation.
But what about a situation where a U.S. resident provides services in Canada on a long-terms basis, without having any office of its own? Often, the services will be provided in the offices of the Canadian client.
Until fairly recently, the general answer would have been that there was no PE. The offices of the client were generally not a PE of the service provider. This was firmly established by a decision of the Federal Court of Appeal in The Queen v. Dudney, 2000 DTC 6169
However, the Fifth Protocol to the Treaty changed all that. Under Article V(9), there can be a deemed PE in such situations.
Article V(9) provides as follows:
“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)Those services are performed in that other State by an individual who is present in that other State for a period or periods aggregating 183 days or more in any twelve-month period, and, during that period or periods, more than 50 percent of the gross active business revenues of the enterprise consists of income derived from the services performed in that other State by that individual; or
(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 the scenario covered by the Dudney case, there would have been a deemed PE based on both of these tests, if Article V(9) had been in effect.