Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether leasing an XXXXXXXXXX storage facility in Canada from an arm's length person can constitute "carrying on business in Canada".
Position: Generally, no, as long as company isn't in the business of storing XXXXXXXXXX itself.
Reasons: As long as there is no agency relationship, and no facts suggesting that the non-resident's true business is the storage of XXXXXXXXXX , the mere rental of a storage facility will generally not be sufficient to constitute carrying on business in Canada.
XXXXXXXXXX 2001-011613
XXXXXXXXXX, 2002
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("Parentco") - Business Number: XXXXXXXXXX
XXXXXXXXXX ("Subco")
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers, with respect to whether the storage of XXXXXXXXXX in a Canadian facility would constitute carrying on business in Canada.
To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of the Canada Customs and Revenue Agency in connection with any income tax return already filed.
DEFINITIONS
In this rulings letter, the following terms have the meaning specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;
(b) "arm's length" has the meaning assigned by subsection 251(1);
(c) "Canada" has the meaning assigned by section 255;
(d) "the CCRA" means the Canada Customs and Revenue Agency;
(e) "corporation" has the meaning assigned by subsection 248(1);
(f) "Proposed Transactions" means the transactions described in paragraphs 8 to 15 below; and
(g) "Tariff" means the Customs Tariff, S.C. 1997, c. 36, as amended to the date hereof.
FACTS
1. Parentco is a corporation wholly-owned by XXXXXXXXXX and is resident in XXXXXXXXXX and not in Canada for purposes of the Act. Parentco carries on the business of producing XXXXXXXXXX for sale in the international marketplace. XXXXXXXXXX. Parentco does not presently carry on business in Canada or have any activities or offices in Canada, except for the following activities:
(a) XXXXXXXXXX; and
(b) Parentco enters into employee loan agreements with one of its XXXXXXXXXX subsidiaries, XXXXXXXXXX ("Aco"), the details of which are described in clause (i) below. As a result of the employee loan arrangements, at any given time Parentco may have a number of individuals on its payroll in Canada, but who are loaned to Aco and who are located in Canada in connection with particular projects as described in clause (ii) below. Consequently, Parentco has a business number for the purposes of remitting employee withholdings and completing T4s in respect of these employees. The nature of the employee loan arrangement between Parentco and Aco and the circumstances under which individuals on the Parentco payroll are present in Canada are as follows:
(i) Aco provides purchasing, transportation, engineering, inspection, administrative, staffing and other services to Parentco and other related corporations. From time to time as may be required, Aco enters into employee loan agreements with Parentco whereby Parentco loans its employees to Aco for a specified "assignment period". Typically, employees subject to such arrangements are assigned to a particular location in XXXXXXXXXX, although Aco is free to utilize the employee's services elsewhere if the need arises. During the assignment period, Parentco and Aco have agreed that the loaned employees are subject to the control and direction of Aco. Parentco and Aco have also agreed that any services performed by the loaned employee during the assignment period at the request of Parentco, or involving matters in which Parentco has an interest, are deemed to be services rendered by Aco. For administrative ease, XXXXXXXXXX national employees loaned by Parentco to Aco are kept on the Parentco payroll and benefits plan during such assignment periods. XXXXXXXXXX national employees loaned by Parentco to Aco are transferred to the Aco payroll and benefits plans.
(ii) Aco has entered into a number of engineering contracts with Canadian corporations. Typically, these contracts are for the development of engineering projects and funding proposals or for the preparation of detailed engineering designs required to upgrade XXXXXXXXXX or other operations in XXXXXXXXXX. Each project usually lasts between XXXXXXXXXX, and several projects may be undertaken under a single contract. A small project management team is assembled for a given project and sent to the Canadian company's offices to monitor the project/contract to ensure that it conforms with Parentco's requirements. These employees also liaise with the various Parentco departments involved with or affected by the project, relay questions and information between the design team and Parentco and report on the overall progress of the project. The Aco project team is not in any way responsible for design work. At present, there is one such project being undertaken in Canada in connection with which XXXXXXXXXX employees loaned to Aco by Parentco are physically present in Canada.
2. Subco is a corporation incorporated in XXXXXXXXXX and is a wholly-owned subsidiary of Parentco. Subco is not resident in Canada for purposes of the Act, and does not presently carry on business in Canada or have any activities or offices in Canada. Pursuant to a service agreement, Subco provides certain services to Parentco, for which it receives a fee. Specifically, Subco facilitates the transportation, storage, inventory management, title transfer and delivery of Parentco's XXXXXXXXXX products. In order to meet its obligations under the services contract with Parentco, Subco enters into contracts with third parties to provide, for example, XXXXXXXXXX and storage services. In addition to the above-noted activities, Subco also holds investments in Parentco group subsidiaries, provides financing to its affiliates and enters into service agreements with other affiliates.
3. XXXXXXXXXX Subco provides these services in consideration for a service fee.
4. Sales of the XXXXXXXXXX are made through XXXXXXXXXX sales agreements between Parentco and the buyer. All sales and marketing activities are conducted by Parentco or its affiliates outside of Canada. Parentco sells XXXXXXXXXX to one or more Canadian companies, either on a term or spot basis. Each of these contracts provides for an FOB sale with delivery taking place in XXXXXXXXXX or some other location outside of Canada.
5. XXXXXXXXXX ("USco") is a corporation governed by the laws of XXXXXXXXXX and is not resident in Canada for the purposes of the Act. USco is in the business of providing services XXXXXXXXXX including XXXXXXXXXX, storage, XXXXXXXXXX, and other related services.
6. USco and its subsidiaries deal at arm's length with Parentco and Subco for purposes of the Act.
7. On XXXXXXXXXX, Subco and USco entered into an agreement outside of Canada to investigate, analyse and determine the feasibility of using a facility located at XXXXXXXXXX (see paragraphs 9 and 10 below) for the storage of XXXXXXXXXX. A feasibility study is to be completed by USco and provided to Subco in XXXXXXXXXX. Neither Subco nor Parentco nor any other affiliate of Parentco is obligated to enter into any storage agreement by virtue of the agreement to pursue the feasibility study.
PROPOSED TRANSACTIONS
8. USco will incorporate a new subsidiary under the laws of Canada or a province thereof, or Usco will use an existing subsidiary incorporated under the laws of Canada or a province thereof (referred to in either case as "Cansub"), to participate in the transactions proposed below.
9. Subco will negotiate outside of Canada, enter into outside of Canada, and execute outside of Canada, a storage services agreement with Cansub for the provision of storage services in respect of XXXXXXXXXX to be delivered to Canada (the "XXXXXXXXXX") at a XXXXXXXXXX facility in XXXXXXXXXX. Subco will agree to pay Cansub an arm's length fee in return for such storage services.
10. XXXXXXXXXX of XXXXXXXXXX. referred to herein as the "XXXXXXXXXX Facility". The XXXXXXXXXX Facility will be operated and licensed by Cansub as a bonded warehouse XXXXXXXXXX.
11. Parentco will produce the XXXXXXXXXX outside of Canada. Subco XXXXXXXXXX will contract with a related corporation for XXXXXXXXXX to the XXXXXXXXXX Facility.
12. It is anticipated that Subco will be the only customer using the XXXXXXXXXX Facility. Cansub will operate the storage facility in accordance with USco's usual operating procedures for such facilities and, in particular, will not be subject to detailed control and instruction by Subco or Parentco as to the manner in which the facility will be operated. The sole service provided by Cansub will be the storage of XXXXXXXXXX and the XXXXXXXXXX will not be XXXXXXXXXX or otherwise improved at any time while it is in Canada. XXXXXXXXXX It is anticipated that some XXXXXXXXXX will be continuously stored at the facility until the storage agreement is terminated.
13. All contracts relating to the sale of the XXXXXXXXXX will be negotiated and completed by Parentco or its affiliates outside of Canada. All sales and marketing activities of Parentco will take place outside of Canada. In this regard, Parentco will offer XXXXXXXXXX products for sale to certain of its customers under a website use agreement on the internet through a website, maintained on a server in XXXXXXXXXX.
Consistent with past practice (see paragraph 4 above), contracts for sales of XXXXXXXXXX products procured over the internet will provide for an FOB sale with delivery taking place in XXXXXXXXXX or some other location outside of Canada (with respect to sales of XXXXXXXXXX, see paragraph 14 below).
14. Transfer of XXXXXXXXXX to the purchaser will occur in Canada at the XXXXXXXXXX Facility, XXXXXXXXXX. None of the sales of the XXXXXXXXXX will be made for delivery to Canadian destinations or to Canadian resident purchasers.
15. Both prior to and during the Proposed Transactions neither Parentco nor Subco will:
(a) negotiate, enter into and/or sign any contracts in Canada;
(b) solicit any contracts or orders in Canada (in this regard, the use of the website, as discussed in paragraph 13 above, will not constitute the soliciting of contracts or orders in Canada);
(c) receive payment for the XXXXXXXXXX in Canada;
(d) maintain any bank accounts in Canada;
(e) manufacture or produce anything in Canada;
(f) make use of any physical premises in Canada, except for the storage facility described above and except as described in paragraph 1 above;
(g) have any employees or agents located in Canada, except as described in paragraph 1 above; and
(h) be listed in any telephone directories in Canada.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to provide Parentco, XXXXXXXXXX and Subco, XXXXXXXXXX, with a XXXXXXXXXX location for storing the XXXXXXXXXX to facilitate the timely distribution of the XXXXXXXXXX to customers XXXXXXXXXX that deal at arm's length with Parentco XXXXXXXXXX.
RULINGS REQUESTED
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. By virtue of the implementation of the Proposed Transactions, Parentco will not be carrying on business in Canada for the purposes of the Act pursuant either to the common law interpretation of "carrying on business in Canada" or to the extended definition of carrying on business in Canada in section 253 of the Act. In particular, Parentco will not be carrying on a business in Canada for the purposes of paragraph 2(3)(b), subsection 115(1) or section 181.4 of the Act.
B. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the CCRA provided that XXXXXXXXXX is being stored at the XXXXXXXXXX Facility as described in the proposed transactions by XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed
(a) whether, by virtue of the implementation of the Proposed Transactions, Subco will be considered to be carrying on business in Canada (and, in this regard, we understand that you may request an advance income tax ruling on this issue at a later time, once there are more details available with respect to the proposed storage services agreement between Subco and Cansub described in paragraph 9, above);
(b) any tax implications with respect to the employees working or studying in Canada as described in paragraph 1, above; or
(c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
Yours truly,
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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