a. How the Use of One or More Independent Contractors Creates a Permanent Establishment in Country and the Ramifications
Generally speaking, a non-resident corporation that carries on business in Canada will be subject to Canadian tax filing requirements and will be required to pay taxes on business profits attributable to that establishment.15 However, it is worth noting that Canada is a party to the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital (the “Convention”), which may alter the foregoing default arrangement. Article VII of the Convention provides that business profits will only be taxable in Canada if the non-resident carries on business through a “permanent establishment”. Article V establishes two types of permanent establishments: a “fixed place of business” or a “dependent agent”. A dependent agent must have the authority, and must habitually exercise that authority, to conclude contracts in the name of the U.S. corporation. Paragraph 7 of Article V stipulates that a permanent establishment will not be created where business is carried out in Canada through a broker, general commission agent, or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business.
The following key factors in the dependent agent permanent establishment analysis are set out in American Income Life Insurance Co. v Canada, 2008 TCC 206 (“American Income”):
- did the agent have the authority to conclude contracts in Canada?
- was the agent of independant status, both legally and economically?
- was the agent acting in the ordinary course of his or her business?
With respect to permanent establishment, the CRA’s views are generally consistent with those of the Organization for Economic Co-operation and Development (“OECD”) in its Model Tax Convention on Income and on Capital and its Commentary. The OECD has clarified that a dependent agent must habitually exercise its authority to conclude contracts, and that those contracts must relate to the operations that constitute the “business proper” of the non-resident.
In light of the foregoing, a truly economically independent contractor in business for him or herself is unlikely to create a permanent establishment for the purposes of Canada’s Income Tax Act. The independent contractor versus employee tests outlined above will be relevant in determining whether an agent was performing services as a person in business on his or her own account. If the agent was not in business for him or herself, then that agent must have significant contracting authority in order to create a permanent establishment.
b. How the Employment of One or More Individuals Creates a Permanent Establishment in Country and the Ramifications
The employment of one or more individuals in Canada may create a permanent establishment where there is either a fixed place of business, or where business is conducted via a dependent agent. The ramifications of the creation of a permanent establishment include that the non-resident corporation will be required to pay taxes in Canada on its business profits attributable to the permanent establishment.
An employee in Canada may create a permanent establishment where that employee has significant power to bind the non-resident corporation in contract. Such authority must
extend to concluding contracts relating to the operations that constitute the “business proper” of the non-resident, and this authority must be exercised habitually. Whether an employee’s contractual authority will be sufficient to create a permanent establishment will depend upon the particular facts and circumstances of each case.