Income Tax Severed Letters - 2011-04-22

Principal Issues: Whether a non-resident corporation that provides portfolio management and similar services to clients worldwide, including clients in Ontario, has a permanent establishment in Ontario and is therefore required to file an Ontario Corporations Tax Return.

Position: Factual determination. Based on the facts provided, the Corporation does not have a permanent establishment in Ontario.

Reasons: The only activity of the corporation in Ontario was the provision of portfolio management and similar services to investors resident in Ontario. The provision of these services, in and of itself, is not considered to be carrying on business in Ontario for the purposes of deeming a permanent establishment to exist under the Corporations Tax Act.

Principal Issues: Clarification requested in respect of the calculation of safe income on hand ("SIOH") where a capital loss on the disposition of a loan receivable would be realized subsequent to the relevant "safe income determination time" ("SIDT").

Position: Based on the particular facts and circumstances of the hypothetical situation described, we are of the opinion that the SIOH attributable to the shares of the capital stock of Xco before the relevant SIDT should be reduced by an amount equal to the anticipated loss related to the loan receivable. It is our position that the SIOH could not reasonably be considered to be fully reflected in the inherent gain in the shares of the capital stock of Xco as the funds loaned by Xco to the related person would be considered to have been "expended" by Xco and would not be "on hand" before the relevant SIDT. In our view, this approach is consistent with the decision of the Federal Court of Appeal in The Queen v. Kruco Inc., 2003 DTC 5506 (FCA). Furthermore, the decision in VIH Logging Ltd. v. The Queen, 2005 DTC 5095 (FCA) can be distinguished as the "loss" that arose from the seismic data deduction in that case, was not a loss that resulted in a reduction in the inherent value of the company before the relevant SIDT.

Reasons: In accordance with the Act, jurisprudence and our previous positions.

Principal Issues: 1) Are general and administrative expenses incurred by a Capital Pool Company ("CPC") deductible before it has identified its 'qualifying transaction' ("QT")?
2) After the CPC has identified the QT, it makes a deposit but forfeits it on a later date. Is the expense deductible?

Position: 1) & 2) - It is a question of fact and further depends on whether such expenses are considered current or capital in nature.

Reasons: Depending on the nature of expense, they may be deductible.