Mr. X, who is an employee of BCo, is a resident of State X for treaty purposes. BCo, which is a resident of State B for treaty purposes, carries on business in Canada through a permanent establishment (“PE”) as defined in the Offshore Activities article in the Canada-State B treaty and does not have a PE in Canada under Art. 5 of either the Canada-State B treaty or the Canada State-X treaty. The Canada-State X treaty also contains an Offshore Activities article. CRA was asked to clarify 2009-0319951I7, respecting where BCo employed Mr. X (among others) to render services in BCo’s PE in Canada, and concluded that CRA looks to the Canada-State X treaty for the definition of PE, in order to determine whether Mr. X was taxable in Canada on remuneration paid to him by BCo. CRA stated:
In applying Article 15 of the Canada-State X treaty, we are determining whether the remuneration paid to Mr. X can be taxed in Canada. Paragraph 1 of Article 15 says that remuneration derived by a resident of State X may be taxed only in State X unless the employment is exercised in Canada. Mr. X is the resident of State X, and we are applying the treaty to Mr. X, not to BCo. ...
In addition, paragraph 2 of Article 15 seems to contemplate that employers can be resident in a third country. ...
…[O]n a purposive reading, one would expect that Canada (i.e. where the PE is located) should be able to tax Mr. X’s remuneration for employment exercised through the PE since BCo is allowed a deduction from the profits taxable in Canada attributable to the PE for the remuneration. However, we doubt that, when applying subparagraph 2(c) of Article 15 of the Canada-State X treaty, it was intended that Canada or State X should look for a definition in a treaty between Canada and a third country to find out if the remuneration can be taxed in Canada.