Recently published in the ABA Section of International Law Privacy, E-Commerce & Data Security Committee Quarterly Newsletter and reproduced here:
The Canada Revenue Agency (“CRA”) was asked in CRA Views 2011-0416181E5 to opine on whether revenue generated from the sale of advertising space on a U.S. website through an independent agent situated in Canada would be subject to Canadian Income Tax. The facts are as follows. A U.S. resident corporation operates a website that is hosted by one or more servers that are all physically located solely in the U.S. The website is managed and maintained in the U.S. The U.S. resident through an independent agent in Canada sells advertising space on its website. U.S. situated employees of U.S. resident update the website in the U.S. to reflect the Canadian advertisers’ ads. Residents in Canada viewing the website can click on the Advertiser’s ad to view more information. Advertisers in turn would pay the independent agent in Canada a fee based on the number of “clicks” on their ads by customers. Part of the fee is retained by the independent agent as fee for services and the remainder of the fee is remitted to the U.S. resident.
In this opinion CRA was not asked to consider whether the U.S. resident was carrying on business in Canada but was asked to determine whether the portion of the revenue remitted to the U.S. resident would be subject to a 25% Canadian income tax withholding. The CRA concluded that the revenue generated from the clicks was a direct result of the services provided by the U.S. resident and its U.S. based employees because the revenue was generated through the services performed by a non-resident person and the amount payable was dependent on the sale of such services (clause 212(1)(d)(iii)(A) of the Income Tax Act. The amount payable however could not be characterized as royalties but according to the CRA was business income.
Where a tax treaty exists between Canada and the country wherein the non-resident taxpayer resides, Canada will cede its jurisdiction to tax to the non-resident’s country unless the business of the non-resident was carried on through a permanent establishment in Canada. Under the business services article of the Treaty, a U.S. resident earning business profits in Canada not through a Canadian permanent establishment will not be subject to Canadian income taxation.
The CRA stated in CRA Views 2008-0279141E5 that Canada is following the OECD on the taxation of electronic commerce. As such CRA confirmed that a website solely by itself will not constitute a permanent establishment. However a non-resident who presents a website to its Canadian customers will be considered to be carrying on business in Canada where (i)the host server is located in Canada; (ii)the business is carried on, wholly or in part, through the operation of the website on that server; (iii)the host server is at the non-resident’s disposal; (iv)the host server is more or less permanently linked to a geographic location in Canada and (v)the website is hosted by the particular computer server on a more than merely temporary or tentative basis. The revenue earned from the click ads would therefore not be subject to Canadian income tax because it was not income generated through a Canadian permanent establishment.
Sunita D. Doobay
TaxChambers LLP is collaborating with Andersen Global® in Canada.