What is permanent establishment and how does it affect taxation?

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By Grant Gilmour

When governments decide who pays tax and who doesn’t, one thing they look at is who is using local resources.  This plays into the concept of “permanent establishment”.  If a business has a permanent establishment, it is likely using resources and should be contributing to the tax base by paying taxes.  This seeming innocent phrase, “permanent establishment” can trigger a lot of tax planning and worry about whether and where a business may owe taxes.

 Discussion:

There are a few definitions of permanent establishment in the Canadian Income Tax Act and IT Regulations.  For example, regulation 5906(2) a permanent establishment is “a fixed place of business of.., including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse or…” (if there is not) “fixed place of business, the principal place at which… business is conducted”.

Reading that definition can make people ask more questions.  For example, you might ask what is “an office”?  Is a hotel room an office?  Is a desk you borrow while in Canada to do work an office?  There are other places to look for the answers to these questions.  One is to look at the tax treaty between the home country of a company doing business in Canada and Canada.  Another place to look is at court cases that have discussed these issues.  Other regulations like regulation 8201 can also provide clarity “(a) where the person carries on business through an employee or agent, established in a particular place, who has general authority to contract for the person or who has a stock of merchandise owned by the person from which the employee or agent regularly fills orders, the person shall be deemed to have a permanent establishment at that place”.

The important point is that generally speaking, once you have a permanent establishment, you are liable for tax in Canada.  This is not necessarily bad because a tax treaty can work to eliminate double taxation (paying tax twice, once in Canada and once in your home country).  But it is still important to plan with and know how much tax is due and where and when it is due.  There can be significant penalties for missing a payment or even a tax return that shows no tax is due.

  Recommendation:

If you would like to discuss your company’s permanent residency and tax filing requirements, please contact Gilmour Knotts Chartered Accountants.