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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Must a US corporation file a corporate tax return simply because its mind and management is in Canada?
Reasons: If a non-resident corporation carries on business in Canada, the legislation requires a corporate tax return even if no tax is payable by reason of a tax convention.
S. E. Thomson
October 23, 2001
Re: Filing Requirement of Non-resident Corporation Managed From Canada
This is in reply to your letter of October 31, 2000 in which you ask for a clarification of filing requirements of a non-resident corporation. We apologize for the delay in responding to your letter.
In your letter, you outline a scenario in which a US corporation is a wholly-owned subsidiary of a Canadian-resident parent corporation, where "central mind and management" of the US corporation is exercised in Canada. The US corporation's business activities within Canada entail the purchase of finished goods from a Canadian-resident company for retail sale in the US market. The accounting and administration functions are performed in Canada through the Canadian parent. You ask several questions related to the filing requirements of the corporation.
Although you have asked for a technical interpretation, the situation you describe appears to involve actual ongoing transactions involving a specific taxpayer. The responsibility for determining the tax consequences of ongoing or completed transactions involving non-resident corporations rests with the tax services offices. Although we are precluded from commenting on your situation, we are able to offer our comments on the provisions of the Income Tax Act (the "Act") that may apply. Since these provisions may or may not be applicable in your situation, our comments are not binding on the Canada Customs and Revenue Agency.
If a corporation is resident in both Canada and the US, the provisions of Article IV of the Canada-US Tax Convention (the "Treaty") apply to determine the corporation's residence for purposes of the Treaty. If, under the Treaty, the corporation is resident in the US, subsection 250(5) of the Act will apply to deem the corporation to be non-resident in Canada for purposes of the Act. As a non-resident of Canada, paragraph 115(1)(a) of the Act applies to tax the corporation in Canada on its income from a business carried on in Canada. It is clear from the definition of "business" in subsection 248(1) of the Act and the extended meaning of carrying on business in Canada in section 253, as well as from Canadian jurisprudence, that the threshold for considering that a non-resident is carrying on business in Canada for the purposes of the Act is very low. In considering what activities would breach this threshold, we are of the view that most management activities involving planning and policy making, starting with central management where the strategic decisions of the corporation are made, are "core" rather than "auxiliary" business activities. This is because the value of any enterprise is highly influenced by managerial activities of this nature.
If a non-resident corporation carries on business in Canada, the corporation must file a return of income in prescribed form by virtue of subsection 150(1) of the Act. However, by virtue of paragraph 1 of Article VII of the Treaty, the business profits of the non-resident corporation may be taxed in Canada only if they are attributable to a permanent establishment in Canada, within the meaning of Article V of the Treaty. Whether or not the non-resident corporation has a permanent establishment in Canada is a question of fact, which can only be determined by a review of all of the surroundings facts and circumstances.
The determination of the business profits of a corporation that are attributable to a particular permanent establishment requires full knowledge of all of the facts of the situation. However, paragraph 4 of Article VII of the Treaty states that no business profits shall be attributed to a permanent establishment by reason of the use thereof for either the mere purchase of goods or merchandise or the provision of executive, managerial or administrative facilities or services for the non-resident.
If a non-resident corporation wishes to claim relief under the Treaty, it must complete and attach Schedule 91 Information Concerning Claims For Treaty-Based Exemptions to the corporate tax return. For assistance with the form, please call the general enquiries line at the International Tax Services Office at 1-800-267-5177.
While you have not directly asked about the deductibility of dividends received by a Canadian corporation from a foreign affiliate, it is observed that a foreign affiliate which has its central mind and management in Canada but which is deemed by subsection 250(5) of the Act not to be resident in Canada for purposes of the Act, would not be resident in a "designated treaty country" for the purposes of section 5907 of the Income Tax Regulations. As a result, the foreign affiliate's income from an active business would be taxable surplus, rather than exempt surplus for the purposes of subsection 113(1) of the Act.
We trust that we have been of some assistance.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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