Canada's treaties - Article 9

The heading for article 9 in most of Canada's treaties, such as the Canada-Denmark treaty, is called 'associated enterprises'. In the Canada-US treaty it is called 'related persons'.

The intent, however, is similar. To ensure that transactions between associated or related persons (i.e. a parent and subsidiary corporation) take place in the same manner as those that are not related. If you would not have paid someone that you aren't related to for the expenses, those expenses are not going to be permitted for cross-border purposes either.

The article sometimes, but not always, specifies the timing for transfer pricing adjustments to be permitted also. For instance, in the Canada-Denmark treaty the maximum time limit is six years from the end of the taxation year, in the Canada-Egypt treaty the maximum time limit is five years. On the other hand, other treaties, such as the Canada-Australia and the Canada-Norway, leave the timing issue to other articles or to the laws in each country.

Canada's treaties - Article 8

Article 8 of the treaties provides an exemption to the permanent establishment rules to allow aircraft and ships that are operating internationally to have to profits attributed to their country of residence.

There is often an additional paragraph to exempt trips within a country.  That makes sense - if you are taking a trip between Toronto and Ottawa or Vancouver and Victoria, that should be taxed in Canada regardless of where the company that owns the plane is resident.

However, this article should always be read carefully as many differences can be found in different treaties.    For instance the Canada-Chile treaty indicates that it applies to enterprises of the specific countries but the Canada-China treaty requires the head office or place of effective management to be in the other country.

Article 7 - paragraphs 4 to end

While each treaty is slightly different, the final paragraphs of Article 7 add the last bits of structure to how business profits are calculated.

Paragraph 4 in the Canada-Bulgaria is fairly common as it sets out that no profits will be allocated to a PE if only the purchase of goods or merchandise is done.  Others, such as the Canada-US treaty expand on that to ensure that the provision of management, executive or administrative functions will also not be allocated income.

There is sometimes another paragraph to ensure that the business profits should be calculated the same every year.

A final paragraph indicates that if the income is covered elsewhere in the treaty, you should not use Article 7.  This gives other paragraphs an override so that income such as dividends (for example) will be taxed under the appropriate article.

The Canada-US treaty adds a paragraph 7 to ensure that the business profits allocated to the PE must be derived from the assets and activities of the PE.