Mr. A and Mr. B, both U.S. resident individuals, are partners of a U.S. partnership (which is fiscally transparent in the U.S.) that provides consulting services in Canada to customers resident in Canada.
Example 1
A and B are present in Canada only throughout the January to May (151 days) and August to December periods (153 days), respectively, representing 216 days in aggregate.
Example 2
A is present in Canada only throughout the January to July period (212 days, including 152 work days), whereas Mr. B does not provide services in Canada. A’s services in Canada generate $200,000 of income, and the partnership’s gross active business revenue during those 212 days is $350,000.
In finding that in both examples, A and B are considered to carry on business in Canada through a permanent establishment as defined in Art. V(9) of the Canada-U.S. Treaty (assuming under Example 2 that the work relates to connected projects), Headquarters stated (footnotes omitted):
“[E]nterprise”… refers to a business carried on by each partner through the partnership. …[T] he determination whether such business is carried on through a permanent establishment is made at the partnership level. If a partnership is found to have a permanent establishment in Canada, each partner will also be found to have a permanent establishment in Canada.
The OECD takes the same approach to applying the duration test involving partnerships under paragraph 3 of Article 5….
Example 1
Subparagraph 9(a) of Article V would not deem the partnership to provide services through a permanent establishment in Canada because no one individual is present in Canada for 183 days or more in any twelve-month period.
Since the partnership has provided services in Canada for 216 days in a twelve-month period, subparagraph 9(b) of Article V will deem the partnership to provide services through a permanent establishment in Canada if they are provided with respect to the same or connected projects. In that case, both Mr. A and Mr. B would be taxable in Canada on the profit attributable to the partnership’s permanent establishment and allocated to them in accordance with the terms of the partnership agreement. …
Example 2
… Mr. A is present in Canada for 212 days in 2015, and the income of the partnership derived from his services is more than 50% of the gross active business revenue of the partnership ($200,000 / $350,000 = 57.14%) during those 212 days.
Subparagraph 9(b) of Article V will not deem the partnership to provide services through a permanent establishment in Canada since the partnership has provided services in Canada for only 152 days in a twelve-month period.
Since the thresholds in subparagraph 9(a) of Article V have been met, the partnership has a permanent establishment in Canada and the profit attributable to the permanent establishment will be allocated to the partners.