CRA again notes that it does not apply 90% as a strict threshold for determining “substantially all”

Among the requirements in para. (c) of the definition of “excluded entity” in s. 18.2 is that “all or substantially all of the businesses … and undertakings and activities of the taxpayer are … carried on in Canada.”

CRA was asked to consider the situation of a Canadian sales subsidiary that focused on making sales in the US through Canadian employees who travelled there, but it did not have a PE there. CRA indicated that it was not relevant that Canada maintained full ability to tax the subsidiary, and that there was a two-part factual test: where does the entity carry on business; and if it carries on business both inside and outside Canada, are all or substantially all of its business activities and undertakings within Canada? CRA further noted that the meaning of “substantially all” has both qualitative and quantitative components and that neither CRA nor the courts have ever considered 90% to be a strict threshold for “substantially all.”

Neal Armstrong. Summary of 3 December 2024 CTF Roundtable, Q.4 under s. 18.2(1) – excluded entity – (c)(i).