Travel restrictions may create provincial permanent establishments

May 11, 2021
Business tax Global mobility International tax

Early in the COVID-19 pandemic, the CRA announced relief from pandemic-induced permanent establishments (PEs) at the national level. In particular, as an administrative matter, and in light of the extraordinary circumstances resulting from the travel restrictions, the CRA stated that it will not consider a non-resident entity to have a PE in Canada solely because its employees perform their employment duties in Canada, where the location of work is solely a result of the travel restrictions being in force.

However, tax authorities have been silent about similar relief at the provincial level. Thus, if travel restrictions cause an employee or operating partner to work remotely in a province, a PE may be created there. This may cause the business to be taxable in that province based on the revenues, salaries, and wages attributable to that province. For the many corporations and partnerships facing this conundrum—which may not even be aware of the issue—it would be helpful if the various levels of governments worked together to issue guidance that administratively relieves the creation of a provincial PE due solely to circumstances arising as a result of the pandemic.

Travel restrictions may take several forms: stay-at-home orders, recommendations against interprovincial travel, reluctance by the individual to take risks associated with travel, and mandatory quarantine periods imposed by provinces on travellers from outside the province. For example, consider a lawyer who, before the pandemic, worked and lived in British Columbia during the week and travelled back to her family in Alberta every weekend. Since the pandemic began, she has ceased her travel back to British Columbia every Monday morning and instead carries on her duties from her family home in Alberta. Does this create a PE in Alberta? This could necessitate extra provincial registration in Alberta to facilitate the filing of an Alberta tax return and the payment of Alberta tax.

Different rules apply to employees and partners.


Provincial law determines which entities are liable for tax in that province. However, many provincial statutes reference the definition of “permanent establishment” provided in regulation 400(2) of the federal income tax regulations.

This definition provides two likely avenues by which a PE could be created in a province because of the pandemic: (1) the employee working in that province has authority to contract, or (2) the corporation or partnership rents space out of which that person works, creating a fixed place of business (CRA document no. 2010-0378421I7, Oct. 13, 2010).

The normal situation of an employee working out of a home office does not create a fixed place of business, because the corporation does not have complete control of the space (The Queen v. Dudney, 2000 DTC 6169 (FCA); Sunbeam Corporation (Canada) Ltd. v. MNR, [1963] SCR 45).

Since it is probably rare for a corporation to rent a space because of the pandemic, the most likely situation in which a PE could be created is where a higher-level employee (one who has authority to contract) is working out of a home office owing to travel restrictions.


In a partnership, each partner is deemed to be carrying on the business of the partnership; therefore, the distinction between corporation and employee does not apply. Thus, the exempting circumstance raised above—the corporation not having full control of the employee’s space—does not seem to be relevant. Accordingly, where a partner works out of his or her home, a PE could be created on the basis of a fixed place of business. Of course, if the partner also has the ability to contract, a PE could be created for that reason, too.

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