April 2, 1992
International Tax Programs Rulings Directorate
Directorate O.S. Laurikainen
Development of Audit 957-2116
Programs Section
Attention: A. F. Aylward
920300
Subject: Article X of the Canada-Switzerland Income Tax Convention (1976) (the "Convention")
This is in response to your memorandum dated January 29, 1992 concerning the interpretation of paragraph 6 of the above Article. Specifically, you are concerned with definition therein of "earnings" that are exempted from tax under Part XIV of the Act. Paragraph 6 of the Convention provides that the term "earnings" for the purposes of determining branch tax:
"... does not include profits attributable to a permanent establishment in Canada of a company which is a resident of Switzerland earned in a year during which the business of the company was not carried on principally in Canada."
You indicated that the Montreal District Office is of the view that a company resident in Switzerland which carries on business in Canada through a permanent establishment would, by virtue of the exemption in paragraph 6, be exempt from tax under Part XIV of the Act in a particular year on profits attributable to that permanent establishment unless the company earns more than 50% of its profits in Canada in that year. You question whether this is the correct interpretation.
While we agree that the proportion of the profits of a company that are earned by its Canadian permanent establishment would be an important criterion to be considered in determining whether the business of the company is principally carried on in Canada, it is our view it should not be the only one. The meaning of the term "principal business" for the purposes of certain provisions of the Act are discussed in Interpretation Bulletins IT-290, IT-371 and IT-400. Those Interpretation Bulletins list gross revenue, operating costs and expenses, value of the assets employed, capital employed, and time and effort expended by employees of each operation as other criteria relevant in determining which business operation represents the "principal business" of a corporation. In our view these other criteria would also be relevant in determining whether or not the business of a company is carried on principally in Canada for the purposes of paragraph 6 of Article X of the Convention. In this respect the Department has no predetermined thresholds that have to be met. Rather each case should be decided on the analysis of its particular facts. In undertaking such an analysis no factor in and by itself should be considered decisive and the significance of a particular factor may vary from case to case.
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