Tax and Revenue Administration Alberta Corporate Tax Act Interpretation Bulletin CTIB-1R1

CTIB-1R1 / June 1997

ALBERTA CORPORATE TAX ACT INTERPRETATION BULLETIN:
TAXABILITY OF A CORPORATION IN ALBERTA ON THE BASIS OF PERMANENT ESTABLISHMENT

This Interpretation Bulletin discusses the definition of the term "permanent establishment" as the basis on which to determine whether a corporation is taxable in Alberta. The purpose of this Bulletin is to provide general guidance as to when a corporation has or is deemed to have a permanent establishment in Alberta. The determination of whether a corporation has a permanent establishment in Alberta is a question of fact and each case must be examined in light of its own particular circumstances. The topics included are:

• Taxability of Corporations
• General Definition of "Permanent Establishment"
• Extended Definition of "Permanent Establishment"
  • No Fixed Place of Business
  • Employees and Agents
  • Public Warehouse
  • Insurance Corporations
  • Ownership of Land in Alberta
  • Use of Substantial Machinery or Equipment
  • Subsidiary Corporations
• Other Considerations

TAXABILITY OF CORPORATIONS

1. Under section 5(1) of the Alberta Corporate Tax Act (the "Act"), a corporation with a permanent establishment in Alberta at any time in a taxation year is required to pay income tax on its amount taxable in Alberta for that taxation year as calculated under the Act. A corporation is required to file an Alberta Corporate Income Tax Return ("AT1") for that year unless it is exempt from filing. Information Circular CT-2, "Filing Requirements", discusses situations under which a corporation is exempt from filing an AT1 return.

GENERAL DEFINITION OF "PERMANENT ESTABLISHMENT"

2. The term "permanent establishment is defined in section 1(2)(f) of the Act. A corporation has a permanent establishment in Alberta if it has a fixed place of business in Alberta or is deemed to have a permanent establishment as discussed in paragraphs 6 to 17. The determining factor of whether the corporation has a fixed place of business is whether the corporation is "carrying on business" at the particular place. The carrying on of business in a place involves something more than being registered or licensed to do business, being listed in the telephone directory, or using letterhead. However, it is not necessary that the level of activity performed by the business at a particular location be extensive in order to constitute "carrying on business".
   
   
3. A fixed place of business includes an office, a branch, a mine, an oil well, a farm, a timber land, a factory, a workshop or a warehouse. The fixed place of business need not be owned or rented by the corporation in order to be a permanent establishment of the corporation as long as the corporation maintains a presence in the jurisdiction.
   
   
4. The corporation does not have a permanent establishment in Alberta if it maintains an office in Alberta solely for the purchase of merchandise.

EXTENDED DEFINITION OF "PERMANENT ESTABLISHMENT"

5. A corporation that does not have a fixed place of business in Alberta under the type of situations described above may still be deemed to have a permanent establishment in Alberta. Section 1(2)(f) of the Act deems a permanent establishment to exist in Alberta under certain circumstances. The important factor remains that the corporation must be carrying on a business in the particular place unless the deeming provision relates to the ownership of land in Alberta (see paragraph 13).

   No Fixed Place of Business

6. If a corporation does not have any fixed place of business, it has a permanent establishment at the principal place in which its business is conducted. In order to make this determination, some factors that may be considered are:

   a) the residence of the officers and directors of the corporation;

   b) the location of its banking facilities;

   c) the location of its bookkeeping operations; and

   d) the location where important corporate decisions are made.

   Employees and Agents

7. A corporation is deemed to have a permanent establishment in Alberta if it carries on business in a place in Alberta through an employee or agent who has general authority to contract on behalf of the corporation. Whether an employee or agent has general authority to contract must be determined in each particular case. For simplicity, the term "employee" is used in the following discussion to describe both an employee and an agent. There is nothing in the law which excludes a commission agent, broker or other independent agent from the reference to an "agent" in this deeming rule.
   
   
8. General authority to contract is considered to exist if the employee is able to bind the company in most revenue transactions and this authority is exercised repeatedly. ("Most revenue transactions" means contracting for those product lines dealt with by the employee and not the total product lines dealt with by the company.) The employee may work from a fixed price list but if he merely takes orders, all of which are submitted to head office for approval, a permanent establishment does not necessarily exist. If an employee refers to head office for credit approval only, or in isolated cases, a permanent establishment may still be deemed to exist.
   
   
9. A permanent establishment exists in Alberta if the corporation has an employee or agent in a particular place in Alberta who has a stock of merchandise owned by the corporation from which he regularly fills orders. ("Regularly" means repeatedly according to an established pattern.) The orders may be received from either the corporation or directly from customers. A stock of merchandise which is kept on hand to be used only as samples, in demonstrations or in displays alone does not satisfy this criteria.
   
   
10. The fact that a corporation has business dealings through a commission agent, broker, or other independent agent does not in itself mean that the corporation has a permanent establishment in Alberta. Each case must be reviewed on the basis of its own facts. For example, a corporation would not be deemed to have a permanent establishment in a jurisdiction where it obtains the services of a lawyer to represent it in a legal matter.

    Public Warehouse

11. A corporation has a permanent establishment in a jurisdiction if it keeps a stock of its merchandise in a public warehouse located in that jurisdiction, from which orders are filled regularly.

    Insurance Corporations

12. An insurance corporation is deemed to have a permanent establishment in Alberta if it is licensed or registered to do business in Alberta. It does not matter whether or not the insurance corporation has a fixed place of business in Alberta or an agent in Alberta who has general authority to contract on its behalf.

    Ownership of Land in Alberta

13. A corporation which owns land in Alberta and which has another permanent establishment in Canada is deemed to have a permanent establishment in Alberta. There is no requirement that the corporation which owns the land use that land in connection with a business. A non-resident corporation which owns land in Alberta but which does not use that land in connection with a business will not have a permanent establishment in Alberta unless it otherwise has a permanent establishment in Canada.

    Use of Substantial Machinery or Equipment

14. A corporation which uses substantial machinery or equipment in Alberta at any time in a taxation year is deemed to have a permanent establishment in Alberta for that taxation year. Whether a corporation is using "substantial" machinery or equipment will generally depend on the size, type, quantity and dollar value of the machinery or equipment. Another factor that may be taken into account is whether the machinery or equipment contributes substantially to the generation of gross revenue earned at the particular place.
    
    
15. To qualify as a permanent establishment, the equipment or machinery must have been used by the taxpayer itself. The equipment or machinery cannot be for use by a sub-contractor or for rental purposes (for further discussion on rentals, see paragraph 20).
    
    
16. The "use" of machinery or equipment is considered to mean that the machinery or equipment is used for the purpose for which it was created. The display of machinery or equipment or the operation of machinery or equipment for demonstration purposes is not considered a "use" for the purpose of determining if a permanent establishment exists.

    Subsidiary Corporations

17. The fact that a corporation has a subsidiary corporation in Alberta or a subsidiary engaged in trade or business in Alberta does not in itself mean that the corporation has a permanent establishment in Alberta. However, the corporation may be deemed to have a permanent establishment in Alberta if the subsidiary satisfies the criteria for an agent.

OTHER CONSIDERATIONS

18. The holding of a permit or licence to operate in a jurisdiction by a bus or truck company does not in itself indicate that there is a permanent establishment in that jurisdiction. In addition, a permanent establishment will not be considered to exist in a province solely by reason that a bus or truck has travelled through that jurisdiction nor does the activity of loading and unloading trucks in itself indicate a permanent establishment.
    
    
19. There is no requirement that the place of business exist for a long time or be located in a durable building. For example, a temporary field office on a construction site could, in certain circumstances, be considered a fixed place of business.
    
    
20. If the corporation is involved in a rental operation, it will be a question of fact as to whether this operation constitutes the carrying on of a business in Canada or whether the revenue received through the rental operation constitutes income from property. It is generally considered that where the principal business of a corporation is the rental of property, the revenue generated from this operation will constitute income from a business and the corporation will, therefore, have a permanent establishment in respect of that business. For example, if a corporation has rental income from real estate that is considered to be business income, the corporation will have a permanent establishment at the location of each rental property as each property is considered to be a fixed place of business.