In a recent technical interpretation indexed as document number 2010-0391541E5, the Canada Revenue Agency (CRA) commented on the issue of whether Article V(9)(b) of the Canada – United States Income Tax Convention (the Treaty) would apply to deem two US corporations to have a permanent establishment in Canada in respect of services provided by one of the US corporations (USCo 2) to a Canadian corporation (Canco) on behalf of another US corporation (USCo 1). USCo 1 had entered into a contract to provide consulting services to Canco. It engaged USCo2 to provide the services, which were provided over a period exceeding 183 days. The three corporations were controlled by a common parent company. The US corporations were not Canadian residents, were residents of the US for the purposes of the Treaty, and were not denied the benefits of the Treaty by the limitation of benefits clause.

Article V(9)(b) of the Treaty provides that where a US enterprise provides services in Canada, the enterprise will be deemed to provide the services through a permanent establishment in Canada if the services are provided in Canada for an aggregate of 183 days or more in any 12 month period with respect to the same or connected project for customers that are residents of Canada or who maintain a permanent establishment in Canada where the services are provided in respect of that permanent establishment.

The CRA concluded that USCo 1 provided services to a resident of Canada (that is, to Canco) through the agency of USCo 2 for the requisite amount of time. Consequently, the CRA took the view that USCo 1 was deemed to have a permanent establishment in Canada under Article V(9)(b) of the Treaty.

Furthermore, as USCo 2 provided services in Canada for more than 183 days in a 12 month period to a customer that maintained a permanent establishment in Canada (that is, to USCo 1) with respect to a single project, the CRA took the position that USCo 2 was also deemed to have a permanent establishment in Canada pursuant to Article V(9)(b) of the Treaty.

This  technical interpretation confirms that multiple non-resident parties to a subcontracting agreement may be deemed to have permanent establishments in Canada where services are provided for the requisite amount of time as set out in Article V(9)(b) of the Treaty. Furthermore, the CRA took this opportunity to note that “[i]n cases where paragraph 9 of Article V of the Treaty have been circumvented the provisions of subsection 245(2) General Anti-Avoidance Rule (GAAR) would be considered.