Principal Issues: Can CRA confirm that, consistent with its interpretation of Article V(9)(b) of the Canada-US Treaty, activities carried on in the residence state by a bank, an insurance company, etc., with its affiliates in the ordinary course of business meets the requirements in Article XXIX A (3) that such activities be carried on with "customers"?
Reasons: See below
September 28, 2009
June 2009, Toronto Practitioner's Breakfast Meeting
PRINCIPAL ISSUE:
Under paragraph 3 of Article XXIX A, an entity engaged in the active conduct of a trade or business that is the business of making or managing investments does not meet the active business test unless the activities are "carried on with customers in the ordinary course of business" by a bank, an insurance company, a registered securities dealer or a deposit-taking financial institution. There is no direct guidance on the question of whether the term "customers" includes affiliates of the bank, insurance company, registered securities dealer, or deposit-taking institution.
At a recent TEI Conference (see CRA document no. 2008-0300941C6 (E)), CRA appears to have expressed the view that services provided by related parties are services provided "for customers" for the purposes of Article V(9)(b) of the Treaty. In particular, the TE states that the test in Article V(9)(b) of the Treaty, under which services provided by a U.S. resident in Canada for an aggregate of 183 days or more in any twelve-month period with respect to the same or connected projects for certain Canadian "customers" may cause the U.S. resident to have a PE in Canada, "applies ... only to services provided by the enterprise to third parties". The CRA was asked whether related parties are considered third parties for this purpose, and confirmed that they are.
- Request: Can CRA confirm that, consistent with its interpretation of Article V(9)(b), activities carried on in the residence state by a bank, an insurance company, etc., with its affiliates in the ordinary course of business meets the requirement in Article XXIX A(3) that such activities be carried on "with customers"?
CRA Response:
It is our view that a bank, insurance company, registered securities dealer or deposit taking institution can have both arm's length and non-arm's length customers. The further question may be whether the activities carried on with non-arm's length customers are carried out by such entity in the ordinary course of business. In this respect it would generally be expected that a business of making or managing investments that qualifies for the exclusion in paragraph 3 of Article XXIX A would be carried on with both arm's length and non-arm's length customers. Moreover it would be expected that transactions with non-arm's length customers would be carried out in accordance with the same procedures and practices and pursuant to the same terms and conditions as transactions with arm's length parties.