Permanent establishment

If you are an employer, you are required to pay EHT if you pay remuneration:

• to employees who report for work at your permanent establishment in Ontario, and
• to employees who do not report for work at any of your permanent establishments, but who are paid from or through your permanent establishment in Ontario.

What is a permanent establishment?

For the purposes of EHT , a permanent establishment in Ontario includes any fixed place of business in Ontario (or relevant jurisdiction). Determining if you have a permanent establishment involves looking at the circumstances specific to your situation.

A permanent establishment includes:

• any fixed place of business in Ontario where day-to-day business activities are carried on (including a function of government), whether it is for gain or non-profit. For example, this could include an office, agency, branch, factory, farm, gas or oil well, mine, timberland, warehouse or workshop
• the company’s head office (or the registered office), as stated in a corporation’s charter or by-laws
• land or premises owned or leased by the employer a place where an insurance corporation is registered or licensed to do business.
• a business carried on through an employee or agent who has general authority to contract for the employer or fill orders from the employer’s merchandise
• a place where, and at the time when, the employer uses substantial machinery or equipment

A permanent establishment also exists:

• If an employer has no fixed place of business, the principal place where the employer conducts business and each place where the employer carries on a substantial portion of the business can still be permanent establishments.
• Even if a business does not otherwise carry on business in Canada in a year, it would still have a permanent establishment in any place where the employer produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves, processes or constructs, in whole or in part, anything in Canada, whether or not the employer exports that thing without selling it before exportation.

Employees and permanent establishment

If you are an employer, you are required to pay EHT if you pay remuneration:

• to employees who report for work at your permanent establishment in Ontario, and
• to employees who do not report for work at any of your permanent establishments, but who are paid from or through your permanent establishment in Ontario.

Reporting for work at a permanent establishment

An employee is considered to report for work at a permanent establishment of an employer if the employee comes to your permanent establishment in person to work.

If the employee does not come to your permanent establishment in person to work, the employee is considered to report for work at a permanent establishment if they may reasonably be regarded as attached to the permanent establishment without physically reporting there.

Attachment to a permanent establishment

Employers pay EHT on the remuneration paid to employees who do not report for work at any permanent establishment of this employer, but who are attached to the employer’s permanent establishment in Ontario.

The ministry looks at the following factors when determining whether an employee is attached to a permanent establishment:

• the nature of the duties performed by the employee
• the place where the employee regularly performs his or her duties
• the place from which the employee is hired
• the permanent establishment from which the employee regularly receives instructions or directions from the employer, through any type of communication
• the place from which the employee is supervised
• the place to which the employee submits attendance records and expense claims, and
• the place from which the employee receives equipment, uniforms, etc.

This list is not exhaustive; the ministry may consider other factors.

We consider that the employee does not report for work to any permanent establishment of the employer if the employee:

• works from a home office which is not considered a permanent establishment because it is not a fixed place of business of the employer, and
• has a direct reporting relationship to a supervisor who also works at a home office which is not a permanent establishment. 

The employee’s remuneration would be subject to EHT if it is paid from an Ontario permanent establishment.

Please note that an employee who reports for work at a permanent establishment belonging to an associated company is generally not considered to be reporting for work at a permanent establishment of the employer.

Attachment example

If the employee

• has a direct reporting relationship to a supervisor who provides instructions and direction who works at an Ontario permanent establishment,
• lives and works outside of Ontario, and
• does not physically report for work at any fixed place of business belonging to this employer (they work from home, which has been determined not to be a permanent establishment), then we would usually consider the employee is attached to the Ontario permanent establishment where his/her supervisor works, although all of the factors need to be considered.  

In this example, the employee’s remuneration would be subject to EHT .

Reporting for work at permanent establishments inside and outside Ontario

If an employee reports for work at permanent establishments of the employer in Ontario and also outside Ontario during a year, all of the remuneration paid to the employee is subject to EHT .

However, if the minister is satisfied that the employee reports for work at the permanent establishment outside Ontario for all or substantially all of the year, none of the remuneration paid to the employee is subject to EHT .  For administrative purposes, all or substantially all generally means 90% or more.

Paid from or through a permanent establishment

If the employee does not report for work at any permanent establishment belonging to this employer (i.e., does not come in to work in person and is not attached to a permanent establishment) then the remuneration paid to the employee is still taxable if the employee is paid from or through an Ontario permanent establishment.

Determining permanent establishment

Examples where a permanent establishment does not exist

Generally, locations where the following activities take place are not considered a permanent establishment:

• an employer conducts business from a source outside Ontario, through mail order and catalogue/online sales, and does not have a stock of goods in Ontario; merchandise is held only for promotional or display purposes
• an independent agent has a stock of merchandise owned by the employer from which the agent regularly fills orders.  An independent agent is one who does not have general authority to contract on behalf of the employer
• when employees report for work at a permanent establishment which belongs to an associated employer (e.g., employees of a subsidiary employer work at a parent company office), unless the location qualifies to be a fixed place of business of the employer.

Fixed place of business

A permanent establishment includes any fixed place of business where day-to-day business activities are carried on (including a function of government), whether it is for gain or non-profit. For example, this could include an office, agency, branch, factory, farm, gas or oil well, mine, timberland, warehouse or workshop.

The place of business may exist for only part of the year (and does not need to exist for a long time).

The place of business usually belongs to the employer, or the employer has certain control and authority over it.  The place of business must be objectively identified with the employer’s business, usually through on-site signage or other public advertising methods.

Office

An office which is owned, leased, or otherwise controlled by the employer is a permanent establishment of the employer if business is carried on there. For example, meetings with clients/customers are held there.  

An office is not a permanent establishment if it is:

• maintained and controlled by the employee at their own choice and expense; for example, to set up appointments at the client’s place of business, to prepare expense reports, etc., or
• used only for storage of records or for promotional purposes including advertising or display of products.

Office in an employee’s residence

Employees’ home offices are generally not considered permanent establishments of the employer. However, an office in an employee’s home may be considered a permanent establishment of the employer if it meets all of the following requirements:

• the home office must be used on a regular and continuous basis for carrying on important functions of the employer’s business, typically including in-person meetings with clients at the home office
• the employee must be required to provide the home office as a condition of employment and the employer must have enough control and authority over the office that it can be considered to belong to the employer.  For example, the employer pays all expenses in connection with the home office and states what it must contain
• the office must be objectively identified with the employer’s business e.g., advertised through on-site signage, or the street address listed on the employer’s website, or the street address listed in telephone directories under the employer’s name.

Determining if a home office is a permanent establishment

Whether an employee’s home office qualifies as a permanent establishment of the employer is a question of determination.  The ministry will generally ask about and consider the following factors, among others:

• what day-to-day business activities of the employer are carried on at the home office
• how frequently the office is used for in-person meetings with clients or coworkers
• whether the office is a room or substantial area in the employee’s residence used exclusively for the employer’s business (i.e., not used for any other purpose) and to what extent the office is maintained and controlled by the employer;
• a copy of the employment contract and a recent T2200 to show that the employee is required to provide the office as a condition of employment;
• evidence that the employer pays fair market value rent for the use of the office (e.g., cancelled cheques or other proof of payment);
• evidence to show that the office is publicly advertised as a place of business of the employer e.g., onsite signage, street address inclusion in sales or product advertising, phone listing in the employer’s name etc.; and
• whether the employee’s residence is registered for property tax and insurance purposes as a commercial place of business.

Determining whether an employee’s home office qualifies as a permanent establishment of the employer is not based on whether the location meets a specific number of the above factors. Each factor must be considered in the unique context of relevant facts to establish its importance.

Warehouse

A warehouse which is used by the employer, but is not owned by the employer or under the employer’s control, is not considered a permanent establishment of the employer. However, where an employee or agent of the employer has the authority to direct the disposition, transfer or disposal of merchandise owned by the employer and stored in the warehouse, the warehouse would be under the control of the employer and would constitute a permanent establishment of the employer.

Fills orders from stock of merchandise

An employer is considered to have a permanent establishment in Ontario if an employee or agent of the employer fills orders from a stock of merchandise from a location in Ontario owned by the employer.

The employee or agent must regularly fill orders (i.e., according to an established pattern). This relates to the usual mode of operation, not the proportion of the orders compared to the total activities of the company.

A permanent establishment could exist even if only a small percentage of the employer’s total sales were filled from stock within the province.

Use of substantial machinery or equipment

A permanent establishment includes a place where an employer uses substantial machinery or equipment. The ministry also considers the length of time the machinery or equipment has been used at a particular site.

• Use means the actual use of the machinery or equipment for which it is intended.  
• Use also means use by the employer.  
• Use does not occur if the machinery or equipment is rented to or used by another person (e.g., by a subcontractor hired by the employer).  The machinery or equipment must be either owned or leased by the employer and must also be used by the employer.
• The display or demonstration of samples by a sales representative or an agent is not considered use for the purpose of this provision.

Interpretation of substantial

Whether machinery or equipment can be described as substantial depends on the employer’s type of business.  Factors to be considered include:

• the quantity, type, size and dollar value of machinery or equipment used in the employer’s business (ships and trucks are not considered to be machinery or equipment for this purpose)
• the extent of the employer’s gross revenue generated by the use of the machinery or equipment.

General authority to contract

An employer is considered to have a permanent establishment in Ontario if business is carried on in Ontario through an employee or agent who has general authority to contract for the employer and the employee or agent is resident in Ontario.

Managers and executives

For employees in management or executive positions, general authority to contract means:

• the manager can conclude contracts on behalf of the employer, which relate to the main business operations of the employer (important business decisions), and
• the authority is exercised repeatedly (not necessarily regularly).

If a manager only has the authority to hire new staff to assist in the manager’s own activities within the company, or to conclude contracts only relating to internal operations, such as leasing a new office space for their own staff, it does not indicate general authority to contract on behalf of the employer.

Sales employees and agents

For employees or agents who conclude sales contracts, general authority to contract means:

• the employee or agent is able to bind the employer in most sales transactions (i.e., contracting for specific product lines, not necessarily the complete product line of the business), and
• the authority is exercised repeatedly (not necessarily regularly).

Where the employee/agent has the authority to negotiate the key terms and details of a contract in such a way that the employer/principal is bound by his activities (i.e., accept offers and execute agreements), regardless of whether or not the contract may require a rubber stamp of approval by head office, a permanent establishment will likely be created.  Where prices and conditions are set in advance by the employer/principal, it is less likely that a permanent establishment will be created.

If an employee can take orders from existing customers, but can’t open new accounts, they would not have general authority to contract.

Employer who does not otherwise carry on business in Canada in a year

If an employer has their permanent establishment located outside of Canada, but has employees working in Ontario, we will have to determine whether a permanent establishment is recognized within Canada, and specifically within Ontario.

A permanent establishment exists in a place where an employer produces, grows, mines, creates, manufactures, fabricates, improves, packs, preserves, processes or constructs anything (in whole or in part), if the employer does not otherwise carry on business in Canada in a year, whether or not the item is exported prior to sale.

Determinations will be made using the common meanings of these words, applied to the specific industry of the employer.

Example

If an employer located outside Canada is in the business of upgrading software for clients in Ontario, working at the clients’ locations, we would apply the meaning of the word “improves” to this situation. As “improve” means to enhance in value or quality; to make better or more useful, we can see that upgrading software enhances the value through updating, and therefore fits the definition of “improves.”  Therefore, this employer would have a permanent establishment in Ontario, and payroll for the Ontario employees would be subject to EHT .

No fixed place of business

An employer who does not have a fixed place of business is considered to have a permanent establishment in the principal place where business is done and in each place where a substantial portion of the employer’s business is carried on.

The principal place of business is the place where the majority of the following activities take place:

• meetings of the board of directors
• signing, contracting and decision-making by authorized officials
• accounting and bookkeeping activities
• negotiating business contracts
• corporate banking
• safekeeping of assets.

For service businesses, it is the place where the services are performed that is the most relevant in the determination of where a particular business is carried on. Generally, we consider substantial in this context to be 20% or more.