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: Are profits attributable to the Canadian offices of a non-resident airline taxable in Canada?
Position: Generally, no.
Reasons: Paragraph 81(1)(c) of the Income Tax Act or the Shipping and Air Transport Article of bilateral tax treaties.
XXXXXXXXXX 2003-000460
S. Leung
April 15, 2003
Dear XXXXXXXXXX:
Re: Taxation of Income of Canadian Offices of XXXXXXXXXX
We are writing in reply to your letter of February 17, 2003, in which you requested our opinion on certain issues with respect to the above-noted subject matter. In your letter, you provided us with the following information:
1. XXXXXXXXXX is an international company which operates a passenger airline.
2. Its planes have landing privileges in XXXXXXXXXX.
3. It has offices in XXXXXXXXXX where its employees representing XXXXXXXXXX in Canada deal mainly with non-Canadian clients travelling to XXXXXXXXXX. A small percentage of these employees' time is involved in selling airline tickets for their employer.
You requested our opinion on the following:
(a) Should corporate tax returns be filed for the Canadian offices of XXXXXXXXXX?
(b) If XXXXXXXXXX has to file corporate tax returns, what is considered to be revenue and expenses for the Canadian operation?
(c) Is XXXXXXXXXX exempt from Canadian taxation because of its status as an international airline or by virtue of the XXXXXXXXXX (the "Convention")?
(d) Does XXXXXXXXXX have a permanent establishment in Canada?
The situation outlined in your letter relates to a situation involving an identifiable taxpayer. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities of such a taxpayer. However, we can offer the following general comments that may be helpful to you.
Our following comments are based on the facts as provided by you above and the assumption that XXXXXXXXXX is not a resident of Canada but rather a resident of XXXXXXXXXX for the purposes of the Income Tax Act (the "Act") and the Convention.
Generally, where the conditions described in paragraph 81(1)(c) of the Act are met, income of a non-resident airline that has landing privileges and offices in Canada would not be taxable in Canada. Paragraph 81(1)(c) of the Act reads as follows:
"There shall not be included in computing the income of a taxpayer for a taxation year the income for the year of a non-resident person earned in Canada from the operation of a ship or aircraft in international traffic, if the country where that person resided grants substantially similar relief for the year to a person resident in Canada."
Therefore, provided that XXXXXXXXXX grants relief substantially similar to that provided by paragraph 81(1)(c) of the Act to a Canadian airline, income earned by XXXXXXXXXX from the operation of an aircraft in international traffic would not be required to be included in computing the income of XXXXXXXXXX in Canada. The term "international traffic" has the meaning assigned by subsection 248(1) of the Act and would include any flights made by XXXXXXXXXX from Canada to a place outside Canada, from a place outside Canada to Canada or from a place outside Canada to another place outside Canada. Where paragraph 81(1)(c) of the Act applies, it is not relevant whether XXXXXXXXXX has or does not have a permanent establishment in Canada through which it carries on business in Canada.
Where the conditions in paragraph 81(1)(c) of the Act are not met, one would then go to the Convention to find out if there is any relief provided by the Convention. XXXXXXXXXX of the Convention states:
"XXXXXXXXXX".
The term "enterprise of a Contracting State" is defined in XXXXXXXXXX of the Convention to mean an enterprise carried on by a resident of a Contracting State. The term "international traffic" is not defined in the Convention. However, XXXXXXXXXX of the Convention states:
"XXXXXXXXXX".
Accordingly, if XXXXXXXXXX of the Convention applies, Canada is precluded from taxing the profits derived by XXXXXXXXXX from the operation of an aircraft in international traffic, regardless of whether XXXXXXXXXX carries on business in Canada through a permanent establishment in Canada.
It is likely for the reason that profits attributable to a permanent establishment or permanent establishments in Canada through which a non-resident person carries on the business of operating an airline are so difficult to determine that Canada has enacted paragraph 81(1)(c) of the Act and Canada, along with many industrialized nations, has entered into bilateral tax treaties containing provisions similar to XXXXXXXXXX of the Convention. As a result, where either paragraph 81(1)(c) of the Act or XXXXXXXXXX of the Convention applies, XXXXXXXXXX does not need to determine the profits earned from the operation of an aircraft attributable to a permanent establishment in Canada, as such profits would not be taxable in Canada.
Corporate tax returns are, however, required to be filed by XXXXXXXXXX regardless of whether profits derived by XXXXXXXXXX from the operation of an aircraft in international traffic are taxable in Canada or not. Clause 150(1)(a)(i)(B) of the Act requires a corporation that carries on business in Canada in a particular taxation year to file a return of income for that taxation year. Also, subparagraph 150(1)(a)(ii) of the Act requires a corporation to file a return of income for a taxation year if tax under Part I of the Act is, or but for a tax treaty would be, payable by the corporation for the year. In the case at hand, there is no need to refer to that subparagraph because it is clear that XXXXXXXXXX carries on business in Canada.
Our above comments do not apply to any income earned by XXXXXXXXXX other than that derived by it in Canada from the operation of an aircraft in international traffic.
We trust you will find the above to be of assistance.
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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