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.
Principal Issues: (1) What are the consequences if an investment held for a non-resident investor by a Canadian service provider ceases to be a "qualified investment" but where, prior to such change, the investment was a "qualified investment"?
Position: (1) Generally, when one of the investments held by a Canadian service provider ceases to be a qualified investment the income derived from the Canadian business of the non-resident will not be protected by the safe harbour rule in subsection 115.2(2). However, where a particular investment has ceased to be a "qualified investment" we will allow a Canadian service provider a grace period of 15 days to recognize this fact and dispose of the property before subsection 115.2(2) would cease to have application.
Reasons: (1) Reading of 115.2(2) and administrative position.
2007-022591
XXXXXXXXXX Shelley Lewis
(613) 957-2118
June 17, 2008
Dear XXXXXXXXXX :
Re: Subsection 115.2(1)
This is in response to your letter of February 28, 2007 inquiring as to the interpretation of subsection 115.2(1) of the Income Tax Act (the "Act"). In particular, you inquired what would be the consequences to a non-resident investor, who uses a Canadian service provider (as defined in subsection 115.2(1) of the Act), as its agent, to invest in Canada, when one of its investments ceases to be a qualified investment. We apologize for our delay in responding.
Our Comments
Subsection 115.2(2) of the Act provides that a non-resident is not considered to be carrying on business in Canada at any particular time solely because of the provision to the person (or partnership of which the person is a member) of designated investment services by a "Canadian service provider". Since the provision contains a test that applies "at any particular time", technically, there is no flexibility to extend the protection under subsection 115.2(2) of the Act to a non-resident who is provided services by an agent in Canada in respect of any investments that are not qualified investments.
Although subsection 115.2(2) will not apply to a non-resident investor if any of its investments ceases to be a qualified investment, in some other circumstances a non-resident may, on a factual analysis, still be considered not to be carrying on business in
Canada. 1 However, in circumstances where investment services are provided to a non-resident in Canada by an agent the non-resident would generally be considered to be carrying on business in Canada if one of the investments held by the non-resident investor ceased to be a qualified investment. In such case, all the income from the business carried on in Canada will technically not be protected by the safe harbour rule in subsection 115.2(2) when any investment held for the non-resident investor is not a qualified investment.
We appreciate that there are situations beyond a foreign investor's control where a qualified investment may suddenly cease to be a qualified investment. Consequently, the technical application of the phrase "at any particular time" could lead to unintended consequences to that foreign investor. In consideration of such consequences, we are prepared to adopt an administrative position which will allow Canadian service providers a grace period of 15 days to recognize that a particular investment has ceased to be "qualified investment" and to dispose of that investment before subsection 115.2(2) would cease to apply.
We trust these comments are of assistance.
Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES
1 The threshold for carrying on business in Canada is very low (see: The Queen v. Gurd's Products Company Limited (85 DTC 5314)). In Rulings' document 2004-0082661 it was determined that a fund is carrying on business in Canada if that is where the any of the fund's profit producing activity takes place. In that document we determined the non-resident fund was not carrying on business in Canada because the profit producing activity of the business was not carried on by the fund, or the manager in Canada. The document also stated that the subcontracting of these activities by a non-resident to Canco would result in the non-resident carrying on business in Canada. See also Rulings' document 2004-0082811.
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