A corporation resident in the U.S. (USCO) plans to expand its sales activities in Canada. Until now, the company has been selling small amounts of product directly to Canadian customers. The Canadian sales have resulted from U.S. tradeshows, industry magazines, and the company's website. USCO does not have a sales force in Canada or a direct advertising program. The company uses an independent wholesaler and bonded warehouse in Mississauga to keep a supply of its products on hand. Orders are received directly by the U.S. head office. Shipping instructions are faxed to the warehouse. Invoicing is done in Dallas and payments are remitted to the U.S. head office. USCO is considering hiring three sales employees to work from an office rented by USCO in Toronto. All purchase orders will be subject to approval and acceptance by USCO's home office.
The Canadian balance sheet and income statement for USCO's second year of operations ending December 31 was as follows:

For its first year of operations ending December 31, the Canadian operations incurred a taxable loss of $4,000 and had an investment allowance, as defined in the Regulations, of $2,000. [ITR: 808]. The aggregate FMV of the assets is $820,000 (Cash - $50,000, A/R - $150,000, Inventory - $410,000, Fixed Assets - $210,000).
Assume an Ontario income tax rate of 14%.
REQUIRED
(A) How will USCO be taxed under Canadian domestic tax law?
(B) Without considering the Canada-U.S. Tax Convention, calculate USCO's total federal and provincial Canadian tax liability under Parts I and XIV of the Act.
(C) Would USCO be considered to have a permanent establishment under paragraphs 1, 2, or 5 of the Canada-U.S. Tax Convention? How does paragraph 6, Article X of the Canada-U.S. Tax Convention impact the Canadian tax return for the company? Perform calculations to reflect the impact.

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Balance Sheet (000s Assets Cash (Cdn curency) Accounts receivable Inventory Fixed assets (UCC) Total assets Liabilities/Equity $50 Accounts payable 150 400 200 Bank loan (used to purchase fixed assets) Tax liability Home office account $400 150 104 146 S800 S800 Total liabilities/equity Income Statement (000s) Sales Expenses $500 $120 30 Sales expenses Office expenses Advertising Total expenses Pre-tax profit Tax provision After tax profit 260 104 S156