2002 Ruling 2002-0132453 - Storage of XXXXXXXXXX - Carrying on business

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: Whether leasing an XXXXXXXXXX storage facility in Canada from an arm's length person can constitute "carrying on business in Canada".

Position: Generally, no, as long as company isn't in the business of storing XXXXXXXXXX itself.

Reasons: As long as there is no agency relationship, and no facts suggesting that the non-resident's true business is the storage of XXXXXXXXXX , the mere rental of a storage facility will generally not be sufficient to constitute carrying on business in Canada.

XXXXXXXXXX 2002-013245

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Parentco") - Business Number: XXXXXXXXXX
XXXXXXXXXX ("Subco")

This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of Subco, with respect to whether the storage of XXXXXXXXXX in a Canadian facility would constitute carrying on business in Canada for Subco.

To the best of your knowledge, and that of the taxpayers named herein, none of the issues involved in this advance income tax ruling request is under objection or appeal or is being considered by any tax services office or taxation centre of the Canada Customs and Revenue Agency in connection with any income tax return already filed. You have already obtained a Ruling Letter from us dated XXXXXXXXXX, 2002, in connection with the transactions set out below on behalf of Parentco (the "Parentco Ruling Letter" - our file number 2001-011613).

DEFINITIONS

In this rulings letter, the following terms have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "arm's length" has the meaning assigned by subsection 251(1);

(c) "Canada" has the meaning assigned by section 255;

(d) "the CCRA" means the Canada Customs and Revenue Agency;

(e) "corporation" has the meaning assigned by subsection 248(1);

(f) "Proposed Transactions" means the transactions described in paragraphs 10 to 18 below; and

(g) "Tariff" means the Customs Tariff, S.C. 1997, c. 36, as amended to the date hereof.

FACTS

1. Parentco is a corporation wholly-owned by XXXXXXXXXX and is resident in XXXXXXXXXX and not in Canada for purposes of the Act. Parentco carries on the business of producing XXXXXXXXXX for sale in the international marketplace. XXXXXXXXXX. Parentco does not presently carry on business in Canada.

2. Subco was incorporated in XXXXXXXXXX as a limited liability company in XXXXXXXXXX and is a wholly-owned subsidiary of Parentco. Subco is not resident in Canada for purposes of the Act, and does not presently carry on business in Canada or have any activities or offices in Canada. Within the corporate group, Subco serves two principal functions:

(a) it is a holding company for several subsidiaries of Parentco and provides financing to affiliates of Parentco; and

(b) pursuant to a services agreement entered into with Parentco dated as of XXXXXXXXXX (the "Subco Services Agreement"), Subco performs or arranges for the performance of a variety of services in respect of XXXXXXXXXX (collectively, the "Products") produced by Parentco. These services include:

(i) XXXXXXXXXX of the Products;

(ii) management of the Products XXXXXXXXXX ;

(iii) delivery of the Products and XXXXXXXXXX , as and when directed by Parentco; and

(iv) inspection of quantity and quality of the Products XXXXXXXXXX and storage.

Subco does not itself actually provide any storage, review or inspection services.

3. Subco has no employees of its own, but performs its functions through its board and managing director(s). Consequently, it fulfils its obligations under the Subco Services Agreement through service agreements entered into with other affiliates or third parties. Subco has entered into a services agreement with Parentco whereby Parentco agrees to provide to Subco support services in such areas as communication support, consulting assistance, financial and accounting support, legal, auditing, and engineering services, as Subco requests.

4. As consideration for providing services to Parentco under the Subco Services Agreement, Subco is paid a monthly fee of US$XXXXXXXXXX (the "Service Fee"). Parentco further agrees to advance the necessary funds for, or to reimburse all direct costs to be incurred in, the performance of Subco's services related to Parentco's products. Pursuant to the Subco Services Agreement, Subco performs the services in arranging the storage as an independent contractor, and not as an agent.

5. Parentco produces XXXXXXXXXX, but not in Canada. Under Parentco's standard arrangements for the sale of the XXXXXXXXXX, Parentco enters into a XXXXXXXXXX arrangement in respect of the XXXXXXXXXX with Subco. Pursuant to the XXXXXXXXXX arrangement, Parentco, XXXXXXXXXX, at all times maintains beneficial ownership of the XXXXXXXXXX until such time as the XXXXXXXXXX is sold to an arm's length third party purchaser, XXXXXXXXXX. Subco therefore has a mere possessory interest in the XXXXXXXXXX until it is sold to an arm's length third party purchaser.

6. Sales of the XXXXXXXXXX are made through XXXXXXXXXX sales agreements between Parentco and the buyer. All sales and marketing activities are conducted by Parentco or its affiliates outside of Canada. Parentco sells XXXXXXXXXX to one or more Canadian companies, either on a term or spot basis. Each of these contracts provides for an FOB sale with delivery taking place in XXXXXXXXXX or some other location outside of Canada.

7. XXXXXXXXXX ("USco") is a corporation governed by the laws of XXXXXXXXXX and is not resident in Canada for the purposes of the Act. USco is in the business of providing services to the XXXXXXXXXX industry including XXXXXXXXXX, storage, XXXXXXXXXX, and other related services.

8. USco and its subsidiaries deal at arm's length with Parentco and Subco for purposes of the Act.

9. On XXXXXXXXXX, Subco and USco entered into an agreement outside of Canada to investigate, analyse and determine the feasibility of using a facility located at XXXXXXXXXX (the "XXXXXXXXXX Facility") for the storage of XXXXXXXXXX . A feasibility study is to be completed by USco and provided to Subco in XXXXXXXXXX. Neither Subco nor Parentco nor any other affiliate of Parentco is obligated to enter into any storage agreement by virtue of the agreement to pursue the feasibility study.

PROPOSED TRANSACTIONS

10. USco will incorporate a new subsidiary under the laws of Canada or a province thereof, or USco will use an existing subsidiary incorporated under the laws of Canada or a province thereof (referred to in either case as "Cansub"), to participate in the transactions proposed below.

11. Parentco will request that Subco arrange for the provision of storage services in respect of XXXXXXXXXX to be stored in Canada (the "XXXXXXXXXX") prior to being delivered to buyers not resident in Canada. Subco will contract with various members of the corporate group to directly or indirectly (by subcontract with third parties):

(a) review the proposed facility (owned by Cansub) to confirm that it meets Parentco's anticipated needs (which involves a final inspection of the facility in Canada by an employee or employees of the affiliate of Subco charged with the review);

(b) negotiate the agreement with Cansub (the negotiation on behalf of Subco would occur outside of Canada);

(c) draft the storage services agreement (the "Storage Services Agreement") to be entered into by Subco and Cansub (this would occur outside of Canada);

(d) provide the XXXXXXXXXX services to XXXXXXXXXX to the XXXXXXXXXX Facility as contemplated by paragraph 11 of the Parentco Ruling Letter;

(e) co-ordinate the delivery of XXXXXXXXXX to the final buyers (this would occur outside of Canada); and

(f) arrange for inspection services for the XXXXXXXXXX.

Inspection services will be performed at two times in the storage process. The first inspection will occur when the XXXXXXXXXX is brought into the XXXXXXXXXX Facility and involves verifying the quantities of XXXXXXXXXX. This will be performed by an independent local inspection company contracted by the responsible affiliate of Parentco (which does not itself perform inspection services, but is in the business of arranging for such services with third parties). The second inspection will occur when the XXXXXXXXXX is delivered out of the terminal and will be performed by a local inspection company nominated by the final buyer of the XXXXXXXXXX. Subco will in each case bear the expense of a portion of the inspection company's fees.

12. Subco's board will approve the Storage Services Agreement and authorize a managing director to execute the agreement. Subco's role in this process will be limited to making arrangements to have the above-noted services (including the storage services) provided. Subco will not itself provide any storage, review or inspection services. Subco will be entitled to recover from Parentco, on a dollar for dollar basis, the costs charged to it by Cansub in return for providing the storage services.

13. XXXXXXXXXX. The XXXXXXXXXX Facility will be operated and licensed by Cansub as a bonded warehouse XXXXXXXXXX.

14. Parentco will produce the XXXXXXXXXX outside of Canada. Subco XXXXXXXXXX will contract with a related corporation for XXXXXXXXXX to the XXXXXXXXXX Facility.

15. It is anticipated that Subco will be the only customer using the XXXXXXXXXX Facility. Cansub will operate the storage facility in accordance with USco's usual operating procedures for such facilities and, in particular, will not be subject to detailed control and instruction by Subco or Parentco as to the manner in which the facility will be operated. The sole service provided by Cansub will be the storage of the XXXXXXXXXX and the XXXXXXXXXX will not be XXXXXXXXXX or otherwise improved at any time while it is in Canada. XXXXXXXXXX It is anticipated that some XXXXXXXXXX will be continuously stored at the facility until the Storage Services Agreement is terminated.

16. All contracts relating to the sale of the XXXXXXXXXX will be negotiated and completed by Parentco or its affiliates outside of Canada. All sales and marketing activities of Parentco will take place outside of Canada. In this regard, Parentco will offer XXXXXXXXXX products for sale to certain of its customers under a website use agreement on the internet through a website, maintained on a server in XXXXXXXXXX. Consistent with past practice (see paragraphs 5 and 6 above), contracts for sales of XXXXXXXXXX products procured over the internet will provide for an FOB sale with delivery taking place in XXXXXXXXXX or some other location outside of Canada.

17. Transfer of XXXXXXXXXX to the purchaser will occur in Canada at the XXXXXXXXXX Facility, XXXXXXXXXX. None of the sales of the XXXXXXXXXX will be made for delivery to Canadian destinations or to Canadian resident purchasers.

18. Both prior to and during the Proposed Transactions, Subco will not:

(a) negotiate, enter into and/or sign any contracts in Canada;

(b) solicit any contracts or orders in Canada;

(c) receive payment for the XXXXXXXXXX in Canada;

(d) maintain any bank accounts in Canada;

(e) manufacture or produce anything in Canada;

(f) make use of any physical premises in Canada, except for the storage facility described above;

(g) have any employees or agents located in Canada; or

(h) be listed in any telephone directories in Canada.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to provide Parentco, XXXXXXXXXX , and Subco, XXXXXXXXXX , with a XXXXXXXXXX location for storing the XXXXXXXXXX to facilitate the timely distribution of the XXXXXXXXXX to customers XXXXXXXXXX that deal at arm's length with Parentco XXXXXXXXXX.

RULINGS REQUESTED

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. By virtue of the implementation of the Proposed Transactions, Subco will not be carrying on business in Canada for the purposes of the Act pursuant either to the common law interpretation of "carrying on business in Canada" or to the extended definition of carrying on business in Canada in section 253 of the Act. In particular, Subco will not be carrying on a business in Canada for the purposes of paragraph 2(3)(b), subsection 115(1) or section 181.4 of the Act.

B. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the CCRA provided that XXXXXXXXXX is being stored at the XXXXXXXXXX Facility as described in the proposed transactions by XXXXXXXXXX.

These rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.

Yours truly,

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