How much can non-residents carrying on a business “do” in Canada without being subject to Canadian income tax on the related business income (and having to file a Canadian tax return)? It’s easy to inadvertently cross the line. A recent advance tax ruling issued by the Canada Revenue Agency (CRA) helps to illustrate some of the important boundaries that non-residents with Canadian business activities should be aware of in order to minimize the risk of being subject to Canadian income tax.

For non-residents who are resident in a country that has an income tax treaty with Canada, the basic rule is that the non-resident will become taxable on income earned in Canada when the non-resident can be said to carry on business in Canada through a “permanent establishment” (PE) located in Canada. While the PE definition varies somewhat from treaty to treaty (in particular the Canada-U.S. treaty has some special rules), in general terms a PE is created by the non-resident having a physical presence in Canada, i.e., either (1) employees or a non-independent agent in Canada who enter into contracts on the non-resident’s behalf, or (2) office space or other place of business in Canada.

A non-resident typically will want to structure its affairs to avoid having a Canadian PE if at all possible.

A common situation where non-residents run into trouble is when they have a Canadian subsidiary. The danger is that the Canadian subsidiary either (1) is treated as the non-resident’s agent because the Canadian subsidiary performs functions as part of the non-resident’s business, or (2) has premises in Canada that are treated as the non-resident’s fixed place of business because the non-resident has the use of part of those premises for significant periods of time (e.g., visiting employees of the non-resident).

In the recent advance tax ruling issued by the CRA, Foreign Parent carried on a manufacturing and distribution business that involved sales to an arm’s-length Canadian customer (CanClient).

Foreign Parent entered into a Services Agreement with its wholly-owned Canadian subsidiary (Cansub) to have Cansub assemble (and in some cases manufacture) and deliver the parts Foreign Parent sold to CanClient (as these activities could be done more efficiently in Canada). Foreign Parent frequently had employees in Canada supervising Cansub personnel or dealing with CanClient. By very carefully structuring its arrangements, Foreign Parent was able to get the CRA to rule that these activities would not result in Foreign Parent carrying on business in Canada through a Canadian PE.


  1. Foreign Parent made sure that its agreements with Cansub identified Cansub as an independent contractor engaged in its own business, i.e., not Foreign Parent’s agent acting as part of Foreign Parent’s business.
  2. These agreements made clear that Cansub did not have authority to receive orders, negotiate with customers, or conclude contracts on behalf of Foreign Parent, or assume an y obligation on behalf of Foreign Parent.
  3. They also made clear tha t Cansub would not hold itself out as an a gent, a representative or a partner of Foreign Parent. 3. Critically, Foreign Parent ensured that it would not have its employees physically present in Canada for more than 90 days in any 12-month period, and that in the event tha t it became necessary to have someone physically in Canada for more than 90 days such persons would be formally seconded to Cansub. This very likely allowed the CRA to conclude that whatever physical presence Foreign Parent had in Canada did not have a sufficient degree of permanence to rise to the level of a “permanent establishment”.
  4. Foreign Parent did not own or lease any real property in Canada, and steps were taken to ensure that no specific portion of Cansub’s facilities were identifiable as Foreign Parent’s business location or reserved exclusively for use of visiting Foreign Parent employees.

While this ruling does not create hard-and-fast benchmarks that necessarily govern in all circumstances (particularly as each tax treaty is somewhat different), it identifies some of the key things that non-residents with Canadian subsidiaries and clients can do to minimize the risk of being taxable in Canada. Please contact a member of the Tax Group if you would like more information about this advance tax ruling (CRA document 2011-0396421R3) or its implications.

Click here for a diagram.