Deemed Services PEs — Subcontractors vs Agents - CRA Adds Fuel to the Fire

The Canada Revenue Agency’s ("CRA") Income Tax Rulings Directorate recently released a technical interpretation¹ which may invite CRA auditors to continue this increasingly common and highly alarming trend. There has been a trend by auditors to conclude with apparent ease that a parent-subsidiary or contract-subcontractor relationship is in fact an agent-principal relationship for purposes of Canada’s bilateral tax treaties. As we discuss below, the agency threshold is not easily met under Canadian agency law, and the frequent jump by CRA auditors to conclude that an agency relationship exists, is creating significant tax uncertainty for Canadian and foreign entities.

The recent technical interpretation arose when a taxpayer requested the assistance of the CRA to determine whether Article V(9)(b) of the Canada-U.S. Tax Convention (the “Treaty”) would apply to deem a US company to have a permanent establishment in Canada in the following hypothetical fact scenario.

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