What is Permanent establishment (PE)?

Definition of PE may vary from different jurisdictions, since each jurisdiction have different provincial, state and/or federal laws therefore permanent establishment treatment for Domestic Law various from the international laws. However the objective may be the same, which is to allow the taxation authorities to exercise their power by relying on a guide to determine which authority may have the legal right to tax the produced income. These rules determine, when and how much another province/state or country may tax an enterprise which carries out a business on their soil. Canada and USA have negotiated tax treaties with each other and other countries (some reasons) in order to resolve conflict and elimination of double taxation when taxpayers are operating in two countries.

Most of the time in order to determine if a PE exists it is required to understand the nature of the business – what functions, operations and activities are carried out, and what individual employees are doing on behalf of their employer.

A permanent establishment should not be confused with a subsidiary. A subsidiary is a separate legal entity. A permanent establishment is not, it is merely a branch and as such an extension of the head office

Tax law, tax treaties, jurisprudence and administrative practices have has been evolving over time. The concept of the PE has been adapted to incorporate new ways of doing business and more in particular internet sales.

Furthermore, filing requirements may result from having a permanent establishment in Canada or in another country.

Domestic law

 

  • ITA 2(1) – Canadian residents are subject to Canadian tax on world-wide income

 

  • ITA 124(1) and ITR 400-402 – Permanent establishment concept applicable in the allocation of provincial income

 

  • IT-177R2 – Permanent Establishment means a fixed place of business

 

–       The principal place at which business is conducted

–       The place where a business is carried on through an employee or agent with general authority to contract or who has a stock of merchandise from which orders are filled

–       Corporation which otherwise has a permanent establishment in Canada owns land in a province – the land is the permanent establishment

–       Place where a corporation uses substantial machinery or equipment

  • ITA 2(3) covers non-residents

 

–       Where a person is not subject to income tax under subsection 2(1) (not resident in Canada) subsection 2(3) provides that if that person

–       Was employed in Canada;

–       Carried on a business in Canada, or

–       Disposed of a taxable Canadian property

Any income tax will be payable upon taxable income determined under division D (sec 115 and 116)

Note that the words “business” is defined in subsection 248(1) and extended meaning of “carrying on business in Canada” in Section 253.

Tax treaties

Once it has been established that a business is being carried on in Canada by a resident of the US, it is necessary to refer to the treaty to determine if its provisions override the Canadian law, as it otherwise applies.  The treaty would only be invoked to provide relief.  A tax treaty will not create an obligation if the obligation does not exist under domestic law.

The main use of the concept of a PE is to determine the right of a Contracting State to tax the profits of an enterprise of the other Contracting state.

The provisions of Article 5 (of OECD Model Tax Convention) also apply in determining whether any person has a PE in any State.  These provisions would determine whether a person other than a resident of Canada or the US has a PE in Canada or the US, and whether a person resident in Canada or the US has a PE in a third state. The key determinants of a PE is defined in Article V – (1) must be a place of business (2) the place of business must be fixed; and (3) the carrying on of the business of the enterprise through this fixed place of business

Under Article 7 of the Canada-US Tax treaty, a contracting state cannot tax the profits of an enterprise of the other contracting state unless the profits are attributable to the PE situated therein.

Article V of the Canada – US tax treaty is for a great part similar to Article 5 of the OECD model tax convention.

Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.

Medical Clinic Contracting with Associates

This policy clarifies the application of the GST/HST to payments made between parties within a medical practice organization with respect to the organization’s operating expenses.

Sample Ruling 7: Medical Clinic Contracting with Associates
 Statement of Facts

1. Practitioner A is a sole proprietor operating a medical practice under the name Clinic XYZ. The sole proprietor owns the practice and all related assets of the practice.

2. Practitioner A contracts with independent contractor associates whereby the associates will render health care services to individuals at Clinic XYZ and agree to pay Clinic XYZ for the use of the facility, medical equipment, and supplies of administrative services.

3. Clinic XYZ does not invoice the associates specifically for the use of the clinic, medical equipment, or administrative services. Rather, the associates and Practitioner A enter into an arrangement whereby the associates will assign to Clinic XYZ the fees payable to them by the provincial health insurance plan. Pursuant to this arrangement, Clinic XYZ will forward the associates’ billings to the provincial health insurance plan for the health care services the associates rendered using their billing numbers for this purpose. Clinic XYZ will collect these fees, remit 60% of the fees to the associates and withhold the remaining 40% in exchange for providing the use of the clinic, medical supplies, and administrative services.

Ruling Requested

The 40% of the associates’ fees that Clinic XYZ withholds is not consideration for a taxable supply and accordingly, no GST/HST applies to this portion of the associates’ fees not remitted to the associates.

Ruling Given

Based on the facts set out above, we rule that the 40% portion of the associates’ fees that Clinic XYZ does not remit to the associates is consideration paid by the associates for a taxable supply consisting of the use of the facility and medical equipment and administrative services. This supply by Clinic XYZ is a commercial activity and if Clinic XYZ is registered or is required to be registered (i.e., is not a small supplier), the GST/HST applies to the consideration paid by the associates for this supply (i.e., the portion of the associates’ fees withheld by Clinic XYZ).

While Clinic XYZ collected the fees payable by the provincial health insurance plan, it did not provide health care services to patients. Clinic XYZ is collecting the amount from the provincial health insurance plan on behalf of the associates. The associates and Practitioner A have an agreement that the associates will pay Clinic XYZ for the use of its facilities. Therefore, the amount of the associates’ fees withheld by Clinic XYZ is not consideration for a supply of health care services; rather the amount withheld is consideration for a taxable supply made by Clinic XYZ to the associates.

Definitions and Interpretations

EXEMPT SUPPLIES OF HEALTH CARE SERVICES

1. Under Part II of Schedule V to the Act, supplies of many health care services are exempt. In general terms, health care services have to promote physical and mental health, and the protection against disease. These services must be performed by health care professionals who are entitled to provide the health care services listed below.

Services Provided by Medical Practitioners and Practitioners

2. A supply of a prescribed diagnostic, treatment or other health care service (e.g., a laboratory testing service) when made on the order of a medical practitioner or practitioner is exempt.

3. A supply made by a medical practitioner of a consultative, diagnostic, treatment or other health care service rendered to an individual (other than a surgical or dental service that is performed for cosmetic purposes and not for medical or reconstructive purposes) is exempt.

4. A supply of any of the following services when rendered to an individual, where the supply is made by a practitioner of the service, is exempt:

(a) optometric services;
(b) chiropractic services;
(c) physiotherapy services;
(d) chiropodic services;
(e) podiatric services;
(f) osteopathic services;
(g) audiological services;
(h) speech-therapy services;
(i) occupational therapy services; and
(j) psychological services when provided by a practitioner who is registered in the Canadian Register of Health Service Providers in Psychology.

5. Only health care services that promote physical and mental health and protection against disease are exempt; other professional services provided by medical practitioners and practitioners (e.g., witness fees for court appearances) are taxable unless exempted by some other provision of the Act. For example, when such supplies are made by hospital authorities that are also charities, the supplies are likely to be exempted by virtue of section 2 of Part VI of Schedule V.

Institutional Health Care Services

6. Institutional health care services made by the operator of a health care facility to a patient or resident of the facility are exempt. [When a medical or prosthesis is installed in a health care facility in conjunction with an exempt institutional health care service, the supply of the prosthesis is also exempt. For example, when medical treatment in a hospital involves the installation of a prosthesis such as an artificial hip, the supply of the prosthesis by the hospital is exempt.] Exempt institutional health care services do not include medical or dental services performed for purely cosmetic purposes.

7. A supply of food and beverages, including the services of a caterer, made to an operator of a health care facility under a contract to provide, on a regular basis, meals for the patients or residents of the facility is exempt.

8. Fees charged by health care facilities to their patients or residents to cover accommodation and other institutional health care services are exempt. However, separate charges for other services, provided on a commercial basis by these facilities, that are not health related (e.g., parking and meals served in a cafeteria to visitors), are taxable.

9. The definition of “health care facility” under Part II (Health Care Services) of Schedule V to the Act includes a facility operated for the purpose of providing residents of the facility who have limited physical or mental capacity for self-supervision and self-care with:

(a) nursing and personal care under the direction or supervision of qualified medical and nursing care staff or other personal and supervisory care (other than domestic services of an ordinary household nature);

(b) assistance with the activities of daily living and social, recreational and other related services to meet the psycho-social needs of residents; and

(c) meals and accommodation.

Cosmetic Surgery for Medical or Reconstructive Purposes

10. Surgical and dental procedures that alter or enhance a patient’s appearance but have no medical or reconstructive purpose, are considered to be cosmetic surgery and, generally, are taxable. Refer to paragraph 6 of this memorandum for more information on this subject.

11. However, cosmetic surgery that is performed for medical or reconstructive reasons is exempt. An example of this type of surgery is skin grafting performed on a burn victim.

12. In certain circumstances, provincial and territorial health insurance plans consider cosmetic surgery to be medically necessary and therefore an insured service. In these cases, the service is exempt. Such surgery is usually evaluated on a case-by-case basis. The criteria for finding cosmetic surgery to be medically necessary include:

(a) the surgery is to alter a significant defect in appearance caused by disease, trauma, or congenital deformity; and
(b) it is recommended by a mental health facility, or
(c) the patient is less than eighteen years of age and the defect is in an area of the body which normally and usually would not be clothed.

Nursing Services

13. A supply of a nursing service provided by a registered nurse, a registered nursing assistant or a licensed practical nurse is exempt where:

(a) the service is provided to an individual in a health care facility or in the individual’s place of residence;
(b) the service is a private-duty nursing service; or
(c) the supply is made to a public sector body (for example, a school authority, a hospital authority or a municipality).

14. Nurses may provide their services directly to patients or they may be hired by employment agencies who specialize in the provision of health care providers. In either case, the charge for their services is exempt.

Dental Hygienist Services

15. A supply of a dental hygienist service is exempt regardless of whether the hygienist is self-employed or is an employee of a management corporation or a medical practitioner.