A Canadian resident company (“Customer”), which is awarded a decommissioning contract for a number of offshore oil/gas platforms (the “Main Contract”), subcontracts some of the required work to an affiliate (“Non-Resident”), which is resident in a country whose treaty uses Art. 5(3) of the OECD model. After Non-Resident performs the “First Segment” for four months in year 1, it takes the equipment and personnel to another jurisdiction outside Canada to work on a non-connected project for a different customer and then, in year 2, returns to the same Canadian location for another four months (the “Second Segment”), under a second contract with Customer, to perform further elements of the Main Contract. Does such decommissioning work come within Art. 5(3) and would the 12-month test therein apply?
CRA responded:
As indicated by Klaus Vogel, “[t]he term ‘building site or construction project’ also covers demolition and clearing operations. Those operations need not be materially connected with subsequent building or construction work.”
…[T]he decommissioning work described above…would likely be considered to fall under the scope of [Art. 5(3)].
A longer period of time between [Segments 1 and 2] could suggest that the projects are separate and should not be viewed as a single unit. However…that both the First Segment and the Second Segment are performed under the scope of the Main Contract… could be a strong indication that the work is only temporarily discontinued.
…[If] the First Segment and Second Segment should be viewed as a single unit…then…Non-Resident would be considered to carry on business in Canada through a permanent establishment in Canada if the time from the beginning of the First Segment to the completion of the Second Segment exceeds 12 months.