Permanent Establishment Issues For Non-Resident Parent Companies With Subsidiaries In Canada

Introduction

In recent years, the Canadian approach to permanent establishment ("PE") determinations has become a source of confusion and uncertainty for Canadian and non-resident taxpayers alike. Due to some debatable audit activity by the Canada Revenue Agency ("CRA") and other tax administrations around the world, the potential existence of a PE has quickly become, along with transfer pricing, one of the biggest tax concerns among corporations today. The most alarming trend we have seen with CRA auditors is where they have made PE determinations on foreign companies that have structured a portion of their operations in Canada through a wholly-owned subsidiary acting as a captive service provider. These assessments are especially controversial in situations where the wholly-owned subsidiary does not habitually conclude contracts on behalf of its foreign parent. However, the tide appears to have finally turned in Canada, following recent guidance from the Tax Court