30 August 2004 GST/HST Interpretation 42363 - Treatment of Leasehold Improvements by the Tenant where their Cost is Greater than the Leasehold Allowances Provided By the Landlord

Please note that the following document, although correct at the time of issue, may not represent the current position of the Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence.

Dear XXXXX:

Thank you for your letter XXXXX concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) with respect to the application of subsection 240(1) of the Excise Tax Act (the "Act"). We apologize for the delay in replying.

The following information was provided in your letter:

•   A is a company incorporated in the United States. A is not a public service body. A is not "resident in Canada" as that term is defined under subsection 132(1) of the Act, nor does it have a "permanent establishment" in Canada as that term is defined in subsection 123(1) of the Act. A does not have any employees or agents in Canada with authority to contract on its behalf.

•   X is a company incorporated in the U.S. X is not registered for GST/HST purposes, and has no presence, location, employees or agents in Canada. X does not carry on business in Canada for GST/HST purposes.

•   X owns XXXXX% of the shares of A. Third parties own the remaining XXXXX% of the shares of A.

•   Y is a company incorporated in the U.S. Y is not registered for GST/HST purposes, and has no Canadian presence, location, employees or agents. Y does not carry on business in Canada for GST/HST purposes.

•   Indirectly, and through at least one other intermediary company, X owns approximately XXXXX% of the shares of Y.

•   X and Y have entered into an agreement whereby X grants to Y the right to distribute A's products in North America.

•   Y owns XXXXX% of the shares of B, which is a company incorporated in Canada and registered for GST/HST purposes. Under an agreement with its parent Y, B distributes A's product in Canada.

•   X and Y are not involved in any of the transactions described subsequently in this letter.

•   C is a company unrelated to either A, B, X or Y. C is a contract manufacturer, incorporated in Canada, that manufactures A's product to A's specifications.

•   Third-party Canadian vendors sell raw materials to A and deliver them in Canada to C, the contract manufacturer that manufactures the product for A.

•   A immediately sells the raw materials and inputs for the manufacture of the product to C.

•   C manufactures the product in Canada and sells the finished goods to A. C's supply of goods to A is made in Canada.

•   A sells inventory to B from A's stock of the finished goods inventory manufactured by C and stored at C's Canadian premises. C delivers the finished goods to B in Canada.

•   Both the raw materials and the finished goods inventory are located in and remain in Canada throughout the entire process of purchasing and reselling the raw materials, manufacturing the product, and selling the finished goods.

•   At any given time, A owns inventory located at the Canadian premises of C, with a value ranging between $XXXXX and $XXXXX.

•   A does not own any capital property, or any property other than its inventory, in Canada.

Interpretation Requested

Whether A is carrying on business in Canada for purposes of subsection 240(1) of the Act.

Interpretation Given

As explained below, based on the information provided, it appears that A is carrying on business in Canada for GST/HST purposes and is therefore required to be registered pursuant to subsection 240(1) of the Act.

Subsection 240(1) of the Act provides that every person who makes a taxable supply in Canada in the course of a commercial activity engaged in by the person in Canada is required to be registered for GST/HST purposes, except where

(a) the person is a small supplier;

(b) the only commercial activity of the person is the making of supplies of real property by way of sale otherwise than in the course of a business; or

(c) the person is a non-resident person who does not carry on any business in Canada.

Whether a particular non-resident person is carrying on business in Canada is a question of fact requiring consideration of all relevant facts. The factors that will be considered in determining whether a non-resident person is carrying on business in Canada for GST/HST purposes in a particular situation include:

•   the place where agents or employees of the non-resident are located;

•   the place of delivery;

•   the place of payment;

•   the place where purchases are made;

•   the place from which transactions are solicited;

•   the location of an inventory of goods;

•   the place where the business contracts are made;

•   the location of a bank account;

•   the place where the non-resident's name and business are listed in a directory;

•   the location of a branch or office;

•   the place where the service is performed; and

•   the place of manufacture or production.

The importance or relevance of a given factor in a specific case depends upon the nature of the business activity under review, and, as always, the particular facts and circumstances of each case. Generally, a non-resident must have a significant presence in Canada to be considered to be carrying on business in Canada.

As previously indicated, the determination of whether a person is carrying on business in Canada for GST/HST purposes is a question of fact requiring consideration of all relevant facts. However, based on the information provided in this case, it appears that A is carrying on business in Canada for GST/HST purposes. Factors indicating that A is carrying on business in Canada for GST/HST purposes in this case are that A purchases raw materials in Canada, has goods manufactured in Canada from the raw materials, has an inventory of the goods in Canada for sale, and delivery of the goods supplied by A occurs in Canada. Based on these factors, A appears to be carrying on business in Canada for GST/HST purposes.

The foregoing comments represent our general views with respect to the subject matter of your letter. Proposed amendments to the Excise Tax Act, if enacted, could have an effect on the interpretation provided herein. These comments are not rulings and, in accordance with the guidelines set out in section 1.4 of Chapter 1 of the GST/HST Memoranda Series, do not bind the Canada Revenue Agency with respect to a particular situation.

For your convenience, find enclosed a copy of section 1.4 of Chapter 1 of the GST/HST Memoranda Series.

Should you have any further questions or require clarification on the above matter, please do not hesitate to contact me at (613) 952-8810.

Yours truly,

Patrick McKinnon
Manager
Border Issues Unit
General Operations and Border Issues Division
Excise and GST/HST Rulings Directorate

2004/07/29 — RITS 43263 — Sections 201 and 235 of the Excise Tax Act