Background
ForCo, which was a U.S. LLC whose members, employees and directors were U.S. residents and whose employees all worked exclusively at a U.S. office, was engaged in a portfolio management business for U.S. clients. Can Worker, who was a U.S. citizen and resident, prior to his emigration to Canada for personal reasons (the “Emigration”), acted as a portfolio manager, along with other team members for a fund that invested in small-cap U.S. stocks for U.S. clients. Can Worker reported to the director of the Fund, who served on a senior steering committee at ForCo.
Retention of ServiceCo
Before the Emigration, ForCo and a global workforce consultancy company (“ServiceCo”) entered into the Services Agreement in order to simplify tax and payroll compliance in Canada in respect of Can Worker as a result of the Emigration. ForCo will pay a monthly service fee to ServiceCo that will be comprised of labour cost, other fees and a management fee. Subsequent to the Services Agreement and before the Emigration, ServiceCo engaged Canco, as a subcontractor, to fulfil its obligations to ForCo under the Services Agreement.
Proposed transactions
On the Emigration, Can Worker and Canco entered into the Employment Agreement providing for fixed semi-monthly salary, with Can Worker (who is still a member of ForCo and receives dividends) performing the same portfolio management services as before (in relation only to U.S. clients) from his Canadian home office. The income derived by ForCo from the services provided in Canada by Can Worker in any twelve-month period will not exceed 50% of the gross active business revenues of ForCo for that period. Can Worker has no authority to conclude contracts on behalf of ForCo, his home office is not identified with the business of ForCo, ForCo has no access to, or control over, the home office at any time, ForCo bears no costs or risks of the home office (although it reimburse Can Worker for travel costs pertaining to any meetings by Can Worker with clients and prospective clients in the U.S. and his computer is owned by ForCo and connected to its network.)
Ruling
ForCo will not be considered to be carrying on business through a permanent establishment, as defined in Art. V of the Canada-U.S. Treaty, situated in Canada, solely as a consequence of the activities of Can Worker performed in Canada.