Unless a tax treaty provides otherwise, a non-resident is deemed to have a taxable presence in Canada if it carries on business in Canada. The Income Tax Act (Canada) does not provide for a comprehensive and exclusive definition of what constitutes the carrying on of a business in Canada, and part of the definition is therefore derived from case law.
Section 253 of the Income Tax Act (Canada) provides for a non-comprehensive definition of carrying on business in Canada. Pursuant to this definition, a non-resident person is deemed to be carrying on business in Canada if the non-resident person:
- 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;
- 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
- disposes of
- 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);
- 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
- 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.
In response to the COVID-19 pandemic, Canada published “Guidance on International Income Tax Issues raised by the COVID-19 crisis”, applicable from 16 March 2020 to 29 June 2020. The guidance provides the following clarification on the creation of a permanent establishment due to travel restrictions:
- A non-resident entity will not create a permanent establishment in Canada with respect to:
- Employees performing their employment duties in Canada; and
- Dependent agent concluding contracts in Canada on behalf of the non-resident while the travel restrictions are in force, provided that such activities are limited to the specified period and would not have been performed in Canada but for the travel restrictions;
- Non-resident entities carrying on business in Canada and resident in a jurisdiction having a tax treaty with Canada but whose activities do not meet the threshold of permanent establishment are required to file a return for that year in order to claim an exemption from Canadian income tax. This filing obligation continues to apply in respect of tax years of the non-resident corporation that overlap with the period while the travel restrictions are in place;
- Where Canada has not entered into a tax treaty with the jurisdiction in which the non-resident corporation is a resident and if such corporation carries on business in Canada, it is required to file a return for that year. However, if it can be demonstrated that the corporation has satisfied the Canadian income tax threshold of carrying on business in Canada only because of the travel restrictions, an administrative relief will be considered as appropriate on a case-by-case basis; and
- For the determination of the required number of days with respect to the presence test for the services permanent establishment provision in Canada's tax treaties, the days of physical presence in Canada solely due to travel restrictions will be excluded.