11 August 2009 External T.I. 2009-0310471E5 - Ontario tax liability of non-resident corporation

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: Whether a non-resident corporation is subject to tax in Ontario on rental income earned from real estate situated in Ontario for taxation years ending after December 31, 2008.

Position: It is a question of fact whether a rental operation constitutes income from property.

Reasons: If rental income earned by a non-resident corporation from Ontario real estate is considered property income, the particular corporation will not be considered to be carrying on business in Ontario for purposes of deeming a permanent establishment to exist under the Taxation Act (2007).

XXXXXXXXXX  						2009-031047
								Kathy Hooey
August 11, 2009

Dear XXXXXXXXXX :

Re: Ontario Tax Liability of Non-resident Corporation

This is in reply to the Ontario tax liability issue raised in your e-mail dated February 16, 2009 in which you requested our comments on your understanding that no Ontario Corporations Income Tax is required to be paid by your client under the Taxation Act 2007 (TA).

In the scenario you presented, your client is a non-resident corporation incorporated in XXXXXXXXXX . This non-resident corporation is a limited partner in several limited partnerships registered in Ontario. XXXXXXXXXX For purposes of the Income Tax Act (Canada) ITA and the Corporations Tax Act (CTA), the non resident corporation has treated the income from the limited partnership as property income.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17,2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

Our comments

For taxation years ending prior to 2009, a non-resident corporation's Ontario income tax liability in respect of property income earned from Ontario real estate, was imposed under subclause 2(2)(b)(i) of the Corporations Tax Act (CTA). Subsubclause 37(1)(a)(i)(A) of the CTA included rental income in the computation of taxable income earned in Canada. In respect of a taxation year ending after December 31, 2008, a non-resident corporation's Ontario tax liability is imposed under subsection 27(1) of the TA. Subclause 2(2)(b)(i) and subsubclause 37(1)(a)(i)(A) of the CTA are not continued in the TA.

New subsection 27(1) of the TA provides that every corporation that has a permanent establishment (PE) in Ontario, at any time in a taxation year, is liable to pay Ontario corporate taxes. It states,

27(1). Obligation to pay tax

Every corporation that has a permanent establishment in Ontario at any time in a taxation year shall, at the time and in the manner required by this Act, pay to the Crown in right of Ontario the taxes for the taxation year imposed by this Part.

Subsection 29(1) of the TA requires a corporation that has a PE in Ontario to pay tax on its Ontario taxable income.

Subsection 1(1) of the TA defines "permanent establishment" for a corporation to have the same meaning assigned by Regulation 400(2) of the ITA. In general, under Reg. 400(2), a corporation will have a PE in Ontario if it has a fixed place of business in the province.

Subsection 1(1) of the TA defines a corporation's Ontario taxable income to be that earned in Ontario determined in accordance with Reg. 400. As a result, a non-resident corporation will be subject to Ontario tax on its taxable income earned in Canada (determined in accordance with section 115 of the ITA) allocated to Ontario.

The tax treatment of rental income earned by a non-resident depends upon whether or not the rental operation is considered to be a business carried on in Canada. Where the rental operation is not considered to be a business, the gross rental income is subject to non-resident withholding tax pursuant to paragraph 212(1)(d) of the ITA, together with subsection 212(13.1) of the ITA which deems a partnership (other than a Canadian partnership) to be a non-resident person for the purpose of Part XIII. Alternatively, the non-resident partner may elect under section 216 to file an income tax return and pay tax under Part I on the partner's share of the income of the partnership, as though the non-resident person were a person residing in Canada, but without being allowed any deductions from that income for the purpose of computing taxable income (i.e., Division C deductions). Please refer to IT-393R2 Election re Tax on Rents and Timber Royalties - Non-Residents and Information Circular IC 77-16R4 Non-Resident Income Tax for more information in this regard.

Where on the other hand, a business is considered to exist, taxable income earned in Canada will generally be computed pursuant to subsection 115(1) of the Act, subject to subsection 96(1), and the non-resident partner will be taxable under Part I of the Act.

It is a question of fact whether a rental operation constitutes the carrying on of a business or whether rents received constitute income from property.

I trust the above comments address your concerns.

Yours truly,

Lita Krantz
Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch