Global

Details

  • Service: Tax, Global Indirect Tax, Global Transfer Pricing Services, Global Compliance Management Services, International Tax
  • Type: Business and industry issue, Regulatory update, Survey report
  • Date: 5/1/2012

Country perspectives on taxing the cloud – Canada 

It is assumed that beneficial ownership of the product passes from the contract manufacturer to the country X vendor, and from there directly to the channel partner in Canada. It is further assumed that the commissionaire is a Canadian corporation that operates physically in Canada and negotiates sales on behalf of the vendor (rather than merely undertaking promotional activities).

Consumer electronics

tax infographic

Permanent establishment

In the above example, the commissionaire would be an agent for Vendor with at least some limited authority to contract on the vendor's behalf. Consequently it is likely that the vendor would be regarded as carrying on business in Canada.


Depending upon the existence and terms of any tax treaty between Canada and country X, the vendor may be protected from Canadian taxation if it is not regarded as carrying on such business through a Canadian "permanent establishment" (PE). However, assuming that the commissionaire is a dependent agent that concludes contracts in Canada on behalf of the vendor, Canadian treaties would generally deem the commissionaire to be a Canadian PE of the vendor (see for example Article V (5) of the Canada-US Treaty.)


If the commissionaire is an agent for the vendor, and country X has no tax treaty with Canada - or the vendor has a PE in Canada – then the profits attributable to the Canadian activities of the vendor through the commissionaire should be determined under normal income allocation or transfer pricing principles.

Related party transactions

Canada does have transfer pricing rules, which in this case could be relevant in determining the income of a vendor in Canada as noted above. There does not appear to be other related-party transactions.

Withholding tax

If the commissionaire is resident in Canada (as above), it should not be subject to Canadian withholding tax (although it will be subject to normal Canadian income tax filing and payment obligations). If the commissionaire were not resident in Canada, payments to it by a vendor could be subject to withholding under Reg. 105 of the Income Tax Act (Canada); the commissionaire would then be required to file a Canadian tax return and seek to apply treaty provisions (should any be applicable) to reduce the withholding tax.


Payments for goods are not subject to withholding tax.

Indirect tax

Customs duties may apply.


The federal Goods and Services Tax or Harmonized Sales Tax (depending on the province of sale) (GST/HST) generally should not apply unless Vendor is a GST/HST registrant.


Provincial sales taxes should be considered for provinces that do not participate in the GST/HST system.

Other issues or planning opportunities

By eliminating the authority of the commissionaire to conclude contracts on behalf of the vendor, the vendor in a treaty jurisdiction would have no PE in Canada and thus no Canadian tax liability.


Many Canadian treaties provide a PE exception for maintenance of a stock of goods for sale or delivery, so a vendor might consider keeping a stock of goods in Canada.

Digital distribution

tax infographic

Permanent establishment

Assuming that the Canadian channel partners are treated as principals (as opposed to agents), then the third channel partners should not cause a vendor to have a PE in Canada.


The sales and marketing assistance from the local country sales agent in Canada should also not cause a vendor to have a PE in Canada provided this agent has no authority to contract on behalf of the vendor.


If the third party channel partners act as the local country sales agent, or if this agent's activities are expanded, the agent's activities may cause a vendor to have a PE in Canada.


If the relevant server is situated in Canada rather than in country Z, the server may potentially constitute a Canadian PE of the vendor. In other circumstances the location of the server should be irrelevant.

Related party transactions

If the local country sales agent is a related party, it should be compensated for its services on an arm's length basis.

Withholding tax

Shrink-wrapped software is characterized as a sale of goods, notwithstanding that the legal form is as a license. Payments for the sale of goods are not subject to withholding tax.


If the payments are made to a US person, payments for the use of software should be exempt from withholding tax under Article XII(3)(b) (Royalties) of the US-Canada treaty.

Indirect Tax

Customs duties apply only if goods are imported.


GST/HST should not apply unless vendor is a registrant.

Public cloud

Characterization of transaction

If no servers are situated in Canada and there is no local sales agent in Canada, even though cloud computing services are made available to Canadian customers, the vendor would probably not be regarded as carrying on business in Canada.

Permanent establishment

Even if sales and marketing assistance is provided in Canada by a local country marketing agent in Canada, this agent should not cause Vendor to have a PE in Canada, provided the agent has no authority to contract.


A Canadian-based server (including a back-up server) may constitute a PE in Canada, to which some income may have to be allocated.

Related party transactions

If a Canadian marketing agent is a related party, it should be compensated for its services on an arm's length basis.


tax infographic

Withholding tax

It is not entirely clear whether payment for cloud computing services would be subject to Canadian withholding tax under Canadian domestic law. There does not appear to be clear authority on this issue, neither has it been an audit focus for the Canada Revenue Agency (CRA).


If Canadian domestic law were to impose withholding tax for such payments and the payments were made to a US person, these payments should be exempt from withholding tax under Article XII(3)(b) (Royalties) of the US-Canada treaty. Other treaties should be considered as applicable.

Indirect tax

GST/HST should not apply unless the vendor is a registrant.

Other issues or planning opportunities

The CRA has not yet usefully commented on this type of arrangement.

Private Cloud

tax infographic

Characterization of transaction

If no servers are situated in Canada, even though cloud computing services are made available to a Canadian affiliate, the vendor would probably not be regarded as carrying on business in Canada by.

Permanent establishment

If the vendor has no agent or other physical presence in Canada, it should have no Canadian PE.


A Canadian-based server (including a back-up server) may constitute a PE in Canada, to which some income may have to be allocated.

Related party transactions

Payments by the Canadian affiliate to related non-residents should be determined on an arm's-length basis.

Withholding tax

It is not entirely clear whether payment for cloud computing services would be subject to Canadian withholding tax under Canadian domestic law. There does not appear to be clear authority on this issue, neither has it been an audit focus for the CRA.


Even were Canadian domestic law to impose withholding tax for such payments, if the payments are made to a US person, these payments should be exempt from withholding tax under Article XII(3)(b) (Royalties) of the US-Canada treaty. Other treaties should be considered as applicable.

Indirect tax

GST/HST should not apply unless the vendor is a registrant.

Other issues or planning opportunities

Canada as the cloud provider: Depending on the nature of the services, the International Business Activity Act(BC) may provide benefits for international financial and similar services provided by a vendor in British Columbia (Canada). In this case, the normal 15 percent federal corporate income tax would apply, but BC provincial tax may not apply. This regime generally applies to management services and financial services that occur within the corporate group and generate some profit. As of 1 September 2010, the regime now applies to digital media such as eGaming and digital transfer of books. There has been some discussion on whether intellectual property (IP) licensing may also fall under the regime.

 

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Contact

Mark Meredith

KPMG in Canada

+1 604 646 6305


Jodi Kelleher

KPMG in Canada

+1 604 646 6305