27 August 2007 External T.I. 2005-0116031E5 - Cdn. Corporation carrying on business in China

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.

Principal Issues: Is the income or loss of a Canadian resident corporation in respect to a business carried on in China relevant in computing the corporation's income under the Income Tax Act?

Position: Yes

Reasons: Canadian resident corporations are taxed on a worldwide basis.

								2005-011603
XXXXXXXXXX 							D. Zhang
(613) 957-2104
August 27, 2007

Dear XXXXXXXXXX:

Re: Canadian Corporation Carrying on Business in China

We are writing in response to your letter of February 10, 2005 in which you request our comments regarding the tax treatment of a corporation incorporated in Canada ("Canco") that subleases a hotel establishment in China from a Chinese incorporated company. In your letter, you state that Canco operates a hotel business in the subleased property and includes the operating results from the business in computing its income for Canadian tax purposes. You ask whether this complies with Canadian tax legislation.

We assume, for the purpose of responding to your query, that Canco is resident in Canada for the purpose of the Income Tax Act (the "Act"). We apologize for the delay in replying.

Our Comments

The situation outlined in your letter appears to relate to a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

The income or loss of a corporation resident in Canada for a taxation year includes the total of the corporation's income or loss for the year from sources inside and outside Canada. The foreign business income or loss of a Canadian resident corporation is required to be computed in the same manner as the income or loss from a business carried on in Canada, namely, the income or loss must be computed in a manner that (i) is not inconsistent with the Act or established rules of law, (ii) is consistent with well-accepted business principles, and (iii) provides an accurate picture of the taxpayer's income or loss for the taxation year in question.

To the extent that income taxes are paid in a foreign country by a Canadian resident corporation in connection with the business it carries on in the foreign country, a foreign tax credit may be available to the corporation to reduce the amount of its income taxes otherwise payable in Canada.

Yours truly,

Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch