Cross-Border Tax Update – July 14, 2022

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Every month or so I like compile some interesting news and tax updates in the cross-border space:

Treaty PE and the 183 day rule

Interesting court case on Permanent Establishment (PE) tests for a US company doing business in Canada. Generally speaking if a company has a PE or fixed place of business in Canada or the US they will be taxable on their business income in that country. The treaty also contains rules related to being in a country (Canada or the US) for more than 183 in any 12 month period.

EY’s summary explains the court decision below:

Canada: Service PE for activities spanned in separate years

On 13 June 2022, the Tax Court of Canada issued its decision in the case Triskelion Projects International Inc. v. the Queen dealing with the definition of Service PE in the Canada-United States (US) tax treaty. In this case, a US corporation provided project management services related to the construction industry in Canada between March 2015 and March 2016 (more precisely, 198 days in 2015 and 54 days in 2016).

The Canada-US tax treaty includes a Service PE clause which states that the source state may tax income earned by a resident of the other state from providing services in the source state if the resident of the other state is present 183 days or more in the source state in any twelve-month period.

The only issue in dispute in this case was whether, under the Canada-US tax treaty, the US corporation had a Service PE in Canada for its 2016 taxation year on the basis that it provided services in Canada for “183 days or more in any twelve-month period.”

The US corporation contended that the tax authorities were not permitted to use the time spent in 2015 in its calculation, since it had used 183 of the 198 days spent by the US corporation in Canada in 2015 towards the 2015 assessment. Consequently, the tax authorities were entitled to carry over only 15 days from its 2015 computation in determining whether there is a Service PE in Canada for its 2016 taxation year. The court rejected the position of the US corporation since as the tax authorities did not make any assessment for 2015, it lacked any factual foundation for its argument. Furthermore, the US corporation admitted the fact that it provided consulting services in Canada for at least 183 days between 19 March 2015 and 18 March 2016 (i.e., within 183 days in any twelve-month period). The court found this fact determinative to fulfill the requirements in the Service PE provision of the Canada-US tax treaty.

The Underused Housing Tax Act receives royal assent

On June 9th, 2022 the Economic and Fiscal Implementation Act received Royal Assent. The act also include the UHT tax that charges non-residents a 1% tax on vacant or underused Canadian real estate. Modeled after the BC vacancy and foreign buyers tax it will be interesting to see how these numbers play out in the coming year. The new tax is effective January 1, 2022.

Simplified Method for Extension of Portability Election

The IRS is providing for an alternate way to make the portability election on a 706 estate tax return. The new procedures outlined in Rev. Proc. 2022-32 allow for the election to be made before the fifth anniversary of the decedents death.

The portability election allow for a spouse to elect to use the remaining estate tax exemption not fully used by their deceased spouse. This can be quite useful for large estates that could be subject to US estate tax in the future.

Minister of National Revenue publishes Canada’s first overall tax gap report

At the end of June the Ministry of national revenue published the first “Tax Gap” report. The “Tax Gap” represents the difference between what Canadian taxpayers owe and what the government has collected on this liability. The “Tax Gap” has remained constant at 9% over the last few years:

You can read more about the new tax report here.

IRS child tax credit FAQ revision

For those of you that have yet to file your 2022 US income tax return it’s worth reviewing the IRS child tax FAQ to assess whether you are eligible for regular or advanced child tax credits. There’s also been a new update on the IRS child tax FAQ related to question 7 and 8.

You can read the full IRS Child tax credit FAQ here.

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