Meaning of Carrying On Business in Canada

March 31, 2014

This posting was authored by Crystal Taylor
a Partner in the Saskatoon Office
and Graham Purse
an associate in the Regina Office of
Miller Thomson LLP

As a non-resident engaging in activities in Canada, it is important to understand whether your activities will result in income tax being levied in Canada.  As general rule, a non-resident is liable to pay Canadian income tax on business income earned in Canada if the non-resident carries on business in Canada.  The threshold question to determine liability for Canadian income tax, therefore, is whether activities will constitute “carrying on business” in Canada.

Carrying on Business in Canada

There is no exclusive definition of the meaning of carrying on business in Canada under the Income Tax Act (Canada).  Therefore, its meaning is derived from the case law. [See discussion below.]

Section 253 of the Income Tax Act (Canada) provides for a non-exclusive extended meaning of carrying on business in Canada. Under that provision, a non-resident person will be deemed to be carrying on business in Canada if the non-resident person:

(a) produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves or constructs, in whole or in part, anything in Canada whether or not the person exports that thing without selling it before exportation,

(b) solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada, or

(c) disposes of

(i) Canadian resource property, except where an amount in respect of the disposition is included under paragraph 66.2(1)(a) or 66.4(1)(a),

(ii) property (other than depreciable property) that is a timber resource property, an option in respect of a timber resource property or an interest in, or for civil law a right in, a timber resource property, or

(iii) property (other than capital property) that is real or immovable property situated in Canada, including an option in respect of such property or an interest in, or for civil law a real right in, such property, whether or not the property is in existence,

the person shall be deemed, in respect of the activity or disposition, to have been carrying on business in Canada in the year.

If the non-resident person is not carrying on business in Canada either because it does not meet the common law meaning of carrying on business as developed by the case law or the legislated extended meaning under section 253, then the non-resident person will not (aside from Part XIII withholding on Canadian source income, the disposition of taxable Canadian property or the earning of employment income in Canada) be liable for tax in Canada.

Permanent Establishment

Although the case law threshold for carrying on business in Canada is relatively low, many of Canada’s tax treaties with other countries provide relief where a business is not carried on through a “permanent establishment” in Canada.  Generally speaking, Canada’s various tax treaties provide that tax will be exigible in Canada only to the extent the profits can be attributed to a permanent establishment in Canada.[1] For instance, this is the case in the Convention Between Canada and the United States of America With Respect to Taxes on Income and on Capital (the “Canada-U.S. Tax Treaty”). For U.S. entities carrying on business in Canada, the question is whether the activities are carried on through a “permanent establishment”. If there is no “permanent establishment” in Canada, then the U.S entity will not be taxable in Canada. Conversely, where a Canadian permanent establishment exists, the U.S. entity will be taxed in Canada on the business profits attributable to that permanent establishment. The permanent establishment rules can be found in Article V of the Canada-U.S. Tax Treaty.

Case Law

The following is a general discussion of the relevant case law that has considered the meaning of “carrying on business” in Canada and the meaning of “permanent establishment”.

Maya Forestales S.A. v. The Queen, 2005 TCC 66

The taxpayer was a Costa Rica corporation (“Maya”) which, between 1994 and 1998, offered Canadian investors the opportunity to invest in a teak-tree plantation in Costa Rica. As a result, more than eighty Canadian investors purchased land on the plantation. The Minister assessed on the basis that Maya carried on business in Canada. Maya took the position that the contracts related to the sale of Costa Rican property and that services relating thereto were performed in Costa Rica.

The Court considered the application of paragraph 253(b) of the Income Tax Act (Canada), which gives an extended meaning to carrying on business, and includes instances where a non-resident “solicits or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada.” The taxpayer argued that the reasonable allocation provisions of paragraph 4(1)(b) of the Income Tax Act (Canada) should have led to an allocation of most of the income to Costa Rica. However, the Court noted that there is no way for the tax authorities to do a reasonable allocation when the taxpayer refuses to provide the necessary information. The Court concluded that Maya carried on business in Canada on the basis that it offered investments for sale in Canada. In the Court’s view, the argument that the contract was to be completed outside of Canada was not persuasive. The Court noted on this point that paragraph 253(b) overturns the common law rule, and that paragraph 253(b) specifically captures situations in which a contract is to be completed partly or entirely outside Canada.

Knights of Columbus v. The Queen, 2008 TCC 307

The appellant, Knights of Columbus (“Knights”), was a US corporation. Relying upon Canadian agents, it provided life insurance to its members in Canada. In the period in question, the Knights raised approximately 25% of its funds from its insurance activities. While not directly relevant to the Canadian income tax issues being considered, the Court noted that Knights was not subject to income tax on its insurance activities in the United States. At issue was whether income tax was exigible in Canada on profits arising from the insurance business. The key question before the Court was whether Knights had a permanent establishment in Canada. Knights operated in Canada with several different types of agents, including 220 field agents, 22 general agents, a field director, and a chief agent.  The Court found that Knights did not have a permanent establishment in Canada, notwithstanding the significant number of agents it engaged in Canada.

The analysis focussed on the Canada-U.S. Tax Treaty, which states that a permanent establishment in Canada can arise from: (a) carrying on business through a fixed place of business in Canada (the “fixed place of business test”); or (b) using agents – other than independent agents – who habitually exercise in Canada authority to conclude contracts in the name of the corporation.

The Court held that a permanent establishment did not exist pursuant to the fixed place of business test. Because the field agents were independent contractors, the organizing and recordkeeping they conducted in their own homes could not be on account of anything other than their own businesses. Further, the Court noted that the agents’ homes had no Knights signage, the agents’ homes were not under the control of Knights, Knights made no operational decisions at the agents’ homes, and Knights had not regular access to the premises.

The Court also held that a permanent establishment did not exist pursuant to the agency test. The Court concluded that the general agents and chief agent were of independent status and acting in the ordinary course of their business. The Court also found that the field agents did not have authority to conclude contracts. As such, none of the agents were caught by the agency test.

CRA Technical Interpretations

The following is a general discussion of the relevant technical interpretations from Canada Revenue Agency (“CRA”) that have considered the meaning of “permanent establishment”.

In 2010-0381951E5, CRA was asked whether a US corporation’s activities in Canada constituted a permanent establishment based on a number of different scenarios.  CRA explained that the determination of the existence of a permanent establishment is a question of fact and stated that Article 5 of the OECD Model Tax Convention provides the appropriate framework for the determination of whether a permanent establishment exists. Specifically: (a) there must be a place of business; (b) the place of business must be fixed; and (c) the non-resident must be carrying on its business wholly or partly through this fixed place of business.

In 2010-0383661R3, CRA was asked to consider a situation in which a Canadian subsidiary provided services to a non-resident parent corporation. The Canadian subsidiary was a taxable Canadian corporation that carried on business in Canada and used its own employees. The question was whether the parent corporation would be carrying on business in Canada. On the facts as presented, CRA took the position that accounting and financial services, the supply of a chief compliance officer, the provision of anti-money laundering services, knowledge management services, and marketing services by the Canadian subsidiary would in themselves not cause the parent corporation to be carrying on business in Canada.

In 2011-0426551R3, CRA considered whether the amendment of a services agreement to provide additional services by a Canadian corporation to a non-resident corporation would result in the non-resident corporation carrying on business in Canada. The Canadian subsidiary carried on its own business and used its own employees to provide computer and support services. The services agreement in question was drafted to ensure that the Canadian subsidiary was prohibited from engaging in any types of activities that would be caught by the permanent establishment rules. CRA concluded that the amendments would not cause the parent to be carrying on business in Canada. Those amendments included risk assessment, development and implementation of an audit plan, maintenance of an audit function, evaluation of changing services and process, issuing reports, among other things.

If you want more information about this topic please contact Crystal Taylor, Partner, at 306.667.5613 or cltaylor@millerthomson.com or Graham Purse, Associate, at 306.347.8338 or gpurse@millerthomson.com.


[1] C. Kyres, “Carrying On Business in Canada”, Canadian Tax Journal (1995), Vol. 45, No. 5 / no 5 p 1631

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