The Phenomenon of Double Taxation and the Interpretation of Article V (Permanent Establishments) of the Canada-U.S. Income Tax Convention (1980)

Abstract

Double taxation is a phenomenon that arises when two or more states have the jurisdiction to tax the common income of the same person, whether a company or an individual. The author considers the causes and effects of double taxation and then examines bilateral double taxation treaties as an important method of reducing this problem. Double taxation is of growing concern due to the ever-increasing international aspects of doing business, which affect both companies and individuals. Ultimately, double taxation impedes the movement of capital, technology, persons and services between states, thus hindering lasting economic co operation. The history of double taxation treaties, some model treaties and finally the 1980 Canada-U.S. Convention are discussed. The writer closely examines the Permanent Establishment provision in the Convention. The concept of a Permanent Establishment is central to the Canada-U.S. Convention, as it is the mechanism by which a resident of one state can be taxed by the other state. The business profits of a resident can only be taxed by the other state if that resident carried on business through a Permanent Establishment in the other state. Drawing on Canadian, U.S. and international taxation treaty interpretations, the author outlines the comprehensive test for determining the existence of a Permanent Establishment. Building on this analysis, she discusses the practical tax planning problem of whether to conduct business in foreign States through Permanent Establishments or through some other entities. Finally, the writer discusses both the advantages and disadvantages of the current Permanent Establishment provision and its effect on trade between Canada and the U.S.