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: Carrying on separate businesses in Canada
Position: Question of fact
Reasons: Depends on whether one business or separate businesses
October 26, 2001
Re: Carrying on Business in Canada
This is in reply to your letter of November 14, 2000 requesting our view on whether a non-resident of Canada who exercises different commercial activities in Canada can be viewed as being taxable in Canada on certain activities only.
You have outlined the hypothetical facts as follows:
1. USCO is a corporation resident in the US the commercial activities of which consist of manufacturing equipment (the "products"), selling the products and offering after-sales services including spare parts mainly to clients who purchased the products.
2. In Canada, one commercial activity of USCO consists of two employees (Employee A and B) who devote half of their time to sale of the product in Canada. These two employees do not report to any particular office in Canada in reference to their sales functions and travel from one province to another. They do not have general authority to conclude contracts in the name of USCO and all sales require approval from USCO's officers in the US. You have described this commercial activity as "Business 1".
3. USCO maintains an office in Eastern Canada where two Canadian employees are exclusively (and Employee A for half of his time) devoted to selling spare parts and providing after-sales services to USCO's Canadian clients. You have described this commercial activity as "Business 2".
4. USCO also maintains in Western Canada spare parts inventory where one employee is exclusively (and Employee B for half of his time) devoted to selling spare parts and providing after-sales services to USCO's Canadian clients.
5. The Eastern office is not related in any way to the sale of products and at all times, existing and prospective Canadian clients who have an interest in purchasing the products must contact USCO in the US.
You consider that with respect to Business 2, USCO maintains a permanent establishment in Canada and pays income tax under Part I of the Income Tax Act (the "Act") on profits related to the sale of spare parts and providing after-sales services in Canada. You require confirmation that the activities of Business 1 are not related to a permanent establishment in Canada as defined in the Canada-United States Income Tax Convention (the "Convention").
The situation outlined in your letter appears to involve either actual proposed transactions or an existing business arrangement involving identifiable taxpayers. Confirmation as to the income tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for making a request for an advance income tax ruling are outlined in Information Circular 70-6R4, dated January 29, 2001, issued by the Canada Customs and Revenue Agency (the "CCRA"). If the arrangement described already exists, assistance in determining its Canadian tax results may be obtained from a tax services office of the CCRA. We can, however, offer the following general comments.
We agree with your analysis that USCO is taxable in Canada for profits attributable to a permanent establishment in Canada under the terms of the Act and the Convention. We consider that manufacture, sales and service functions related to the same products would generally constitute only one business. Accordingly, we would generally disagree with your apparent conclusion that the activity associated with the sale of a particular product could be separate business apart from after-sales services provided to customers who have purchased that product. However, one can only attribute to a permanent establishment the income attributable to the business conducted through the permanent establishment. As a result, if any one of the stated functions is not carried out through the permanent establishment, it would seem that income associated with that function cannot be attributed to the permanent establishment. However, it would generally be difficult to accept, without a detailed review of the facts, that a person who is involved with selling could provide after-sales service through a permanent establishment to customers who have purchased the product but would not generate any of his sales of the product through that permanent establishment.
We refer you to Interpretation Bulletin IT-206R 'Separate Businesses' on the question of whether a taxpayer is conducting one business or more than one when more than one business operation is carried on simultaneously. In particular, we refer you to paragraph 2 therein, which states:
"Simultaneous Business Operations
2. Whether the carrying on of two or more simultaneous business operations by a taxpayer is the same business is dependent upon the degree of interconnection, interlacing or interdependence and the extent of the unity embracing the business operations. The fact that the business operations of a taxpayer are of different natures, for example manufacturing and selling, does not preclude them from being the same business if there is a sufficient interconnection, interlacing or interdependence between the operations."
We also refer you to Du Pont Canada Inc. v. The Queen 2001 DTC 5269 wherein the Federal Court of Appeal considered the question of separate businesses. The commonality of customers was a crucial factor in that case. In your stated facts, it would appear that Business 1 and Business 2 have the same customers and in fact, Business 2 exists for Business 1 customers.
We trust these comments will be of assistance.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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