CRA comments on US company holding inventory in Canada

In 2012-0438691E5, the Canada Revenue Agency (CRA) considered a US corporation (US Co) that shipped inventory to an unaffiliated customer’s warehouse in Canada. Title to the inventory remained with US Co until such time as the customer required the inventory. The CRA usefully commented that the mere storage of inventory in an unaffiliated company’s warehouse should not, standing alone, result US Co carrying on business in Canada. The CRA went on to comment that if, for some reason, US Co was carrying on business in Canada, the Canada-US tax treaty (Treaty) could exempt US Co from tax in Canada. Article VII of the Treaty provides that US Co’s business profits may be taxed in Canada only if US Co carries on business in Canada through a permanent establishment. Article V(6) of the Treaty provides that a permanent establishment is deemed not to include the following: (a) a facility in Canada used solely for the purposes of storage, display or delivery of goods or merchandise; (b) a stock of goods or merchandise that is maintained in Canada solely for the purpose of storage, display or delivery; or (c) a stock of goods or merchandise that is maintained in Canada solely for the purpose of processing by another person. Finally, the CRA noted that if US Co were to rely on Treaty protection, it would be required to file a T2 tax return in Canada and claim that protection in Schedules 91 and 97.