This is in response to your memorandum of August 31, 1994, and further to your telephone conversation with Mitch Bloom of this office concerning the above subject. At issue is whether XXXXX is carrying on business in Canada and thereby required to register pursuant to subsection 240(1) of the Excise Tax Act (the Act).
Statement of Facts
XXXXX operates under the business name XXXXX which are held annually in Canada XXXXX[.] Purses are paid by XXXXX out of monies received from XXXXX[.]
XXXXX receives payment from XXXXX in respect of two separate supplies:
(1) a supply of services, namely
XXXXX
(2) a supply of intangible personal property, namely
• Canadian television rights to these two races
XXXXX representatives arrive in Canada a few days prior to XXXXX and are present in Canada until the XXXXX finished.
Client's Contention
XXXXX does not feel that their activities in Canada constitute carrying on business in Canada in that they do not have a significant presence in Canada. They also argue that:
• The contract for the services provided in Canada is concluded outside of Canada;
• The place where the operations that produce profits is outside Canada where the reputation, traditions, rules and goodwill originate;
• XXXXX does not maintain a branch or office in Canada nor does it have employees located here; and
• XXXXX business activity is not regular or continuous (presumably they mean in Canada).
Your Analysis
You agree that the place where the contracts for the supplies were made was outside Canada.
It would appear that you believe that, because the supply of services and television rights are supplies made in Canada, the place where the operations that produce the profits (from these supplies) is in Canada.
You also feel that XXXXX [a]ctivities in Canada can be considered regular or continuous based on a letter received from Headquarters dated December 31, 1991 and that these activities in Canada are engaged in twice a year, year after year.
Our Analysis
Whether or not a non-resident person is carrying on business in Canada is a question of fact based on all the relevant circumstances of a particular case. In the case at hand, the facts set out above state that XXXXX operates XXXXX in Canada as well as elsewhere. If this is the case and XXXXX charges admission to the XXXXX, XXXXX would have to register for GST pursuant to subsection 240(2) of the Act before making any such supply whether or not they are carrying on business in Canada. We suspect, however, that, in fact, XXXXX merely oversees the XXXXX in Canada to ensure that their established standards are adhered to in addition to providing the sponsor with the Canadian television rights. Our response is based on this assumption.
Your analysis gives significant attention to whether the activities of XXXXX in Canada are regular or continuous. While this is a valid concern, the criteria to be considered as set out in the policy paper entitled Carrying on Business in Canada and GST memorandum 200-1-1 will, in most cases, be the determining factors as to whether the non-resident has a significant presence in Canada and can be considered to be carrying on business in Canada. As stated in paragraph 22 of that Memorandum, isolated transactions carried out in Canada that are part of a business that is carried on outside Canada may not be considered the carrying on of the business in Canada given that the criteria will usually not be met to a sufficient degree.
In the case at hand, there seems to be little doubt that the activities of XXXXX in Canada are "regular" in that such XXXXX in Canada, year after year.
However, the fact that a non-resident business has regular or continuous business activities in Canada is not the determining factor as to whether that non-resident is carrying on business in Canada. A non-resident mail order house may do significant business in Canada but may not be technically carrying on business in Canada. The main theme of the criteria, as set out, is to determine if a non-resident has significant presence in Canada so as to be considered to be carrying on business in Canada.
The prime area of contention seems to be the place where the operations that produce the profits takes place. XXXXX contends that that place is the United States where the reputation, traditions, rules and goodwill were developed and maintained. Such an argument may have some merit.
Where the object of a transaction is the rendering of service by a non-resident and a non-resident technician enters Canada to carry out the terms of the undertaking, and to perform the service which was the principal object of the contract, entry of the technician into Canada in such a case will generally be sufficient to constitute a carrying on of business by the non-resident principal.
The main question in the case at hand is whether the services provided by the technicians in Canada, i.e., XXXXX in accordance with rules established by XXXXX is the object of the contract or if the real object of the contract is the acquisition of the right to operate XXXXX under the name and reputation of XXXXX in which case the recipient will be bound by the rules and standards set by XXXXX[.] A review of the terms of the contract should demonstrate the principal object of the transactions.
If it can be demonstrated that the principal object of the transaction is really the use of the name of XXXXX and that the recipient is bound by certain standards set by XXXXX, the fact that XXXXX technicians enter Canada to assure that those standards are being met will not, in itself, be sufficient to constitute the carrying on of business in Canada by XXXXX[.]
Alternatively, if the terms of the contract demonstrate that the objective of XXXXX is to earn income in Canada from the operation or participation in XXXXX in Canada, the presence of the technicians in Canada will be sufficient to consider XXXXX to be carrying on business in Canada.
As you can see, there can be a fine line in the determination of whether a non-resident is carrying on business in Canada. In many cases the terms of the contract will demonstrate the nature of the transaction and the work to be performed. For instance, where a contract is for the sale of a computer software system from a non-resident and part of the contract calls for the principal to do the installation at the recipient's place of business in Canada, the principal object of the contract would most likely be the sale of the system and the fact that non-resident enters Canada to perform the installation would not, in itself, be sufficient activity to constitute the carrying on of business in Canada by the non-resident supplier.
Alternatively, a contract made by a Canadian registrant with a non-resident to install a computer system at the Canadian recipient's place of business would most likely constitute the carrying on of business in Canada by the non-resident since the principal object of the contract was the service to be provided in Canada.
If additional information is required, please contact Gerry O'Reilley at (613) 954-4397.
H.L. Jones
Director
General Tax Policy
Policy and Legislation
Excise/GST
XXXXX
sign-off: Mitch Bloom
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