10 September 2001 External T.I. 2001-0090655 - QSBCS business primarily in Canada

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 Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Is a particular business being carried on in Canada?

Position: Question of fact.

Reasons: Actual situation and completed transactions so we could only provide very general comments.

XXXXXXXXXX 2001-009065
M. P. Sarazin, CA
September 10, 2001

Dear XXXXXXXXXX:

Re: Qualified Small Business Corporation Share

This is in reply to your letter of June 28, 2001, requesting our views as to whether a specific partnership is operating primarily in Canada for the purposes of determining whether shares of two Canadian-controlled private corporations that each own a 50% interest in the partnership would qualify as a "qualified small business corporation share" ("QSBCS") within the meaning assigned by subsection 110.6(1) of the Income Tax Act (the "Act").

Comments

As explained in Information Circular 70-6R4 dated January 29, 2001, responsibility for the determination of the income tax implications of completed transactions rests with the relevant tax services office. Since your situation involves a completed transaction, we can only provide you with the following general comments.

For the purpose of subparagraph 110.6(1)(c)(i) of the definition of QSBCS more than 50%, or for the purposes of subsection 248(1) of the definition of a "small business corporation" all or substantially all, of the assets of the corporation referred to therein must be attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it.

It is our view that where a corporation has a partnership interest as one of its assets, it is the underlying partnership assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all or 50% or more of the corporation's assets are used in an active business for the purpose of the definition of small business corporation under subsection 248(1) of the Act and for the purpose of the definition of QSBCS under subsection 110.6(1) of the Act.

Whether a particular business is carried on by a partnership primarily in Canada or some other place is a question of fact and, in order to make such a determination, it would be necessary to review all the facts surrounding the particular situation. Officials from the relevant tax services office could make this determination after a review of the relevant facts.

Under Common Law principles, a business is generally considered to be carried on in the place where the operations from which the profits arise are located. The determination of this place is largely a question of fact. As a general rule a business that involves the sale or leasing of goods is usually carried on in the country where the corporation is resident, unless the business (or a part of it) is conducted by a virtually autonomous branch operation outside of Canada or the sales contracts are concluded outside of Canada. The facts would have to be reviewed to make a determination in any particular situation. Where a corporation's business involves the rendering of services, the business is generally carried on in Canada only to the extent that services are rendered in Canada, necessitating an apportionment of net business income on a reasonable basis. These same principles would also apply to a partnership.

We note that you provided a breakdown of the billing percentages between sale of supplies, marine transportation, local transportation and construction and assembly. The relevant tax services office would need to analyse the actual contracts to determine, in substance, which operations are generating the real profits.

We trust these comments will be of assistance.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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