27 June 2006 External T.I. 2006-0174661E5 - Resident Carrying on Business Outside of 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.

Principal Issues: Whether Canadian resident carrying on business outside of Canada and, if so, to what extent are losses deductible in computing income.

Position: Question of fact.

Reasons: A review of the actual business operations of a particular taxpayer will determine whether or not the taxpayer is carrying on a business. The answer to that issue will determine the deductibility of any losses in computing income for income tax purposes.

A. Seidel
XXXXXXXXXX 							(613) 957-2058
								2006-017466
June 27, 2006

Dear XXXXXXXXXX:

Re: Carrying on Business Outside of Canada

This is in reply to your e-mail concerning a Canadian resident carrying on business outside of Canada.

Background

It is our understanding that you are considering a request to be the Canadian representative of a XXXXXXXXXX. You have asked whether a Canadian resident investor who takes part in the above venture would be entitled to deduct various expenditures for income tax purposes. In addition, you request guidance with regard to any obligations that may arise under Canadian income tax law to a taxpayer who promotes this investment opportunity to Canadian investors.

Our Comments

The particular circumstances in your letter on which you have asked for our views relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions involving this specific type of arrangement and a specific investor, you should request such an advance income tax ruling. Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.

Section 3 of the Income Tax Act (the "Act") provides that the income of a taxpayer for a taxation year, for the purposes of Part I, includes the total of all amounts each of which is the taxpayer's income for the year (other than a taxable capital gain from the disposition of a property) from a source inside or outside Canada, including, without restricting the generality of the foregoing, the taxpayer's income for the year from each business. The income or loss from each such source should be computed in accordance with well accepted business principles to produce an accurate picture of the income for a fiscal period. Where a taxpayer's source(s) of income includes farming, subsection 31(1) of the Act may apply to restrict the amount of the loss that a taxpayer may claim in a taxation year in those situations where the farming income is not the taxpayer's chief source of income.

Proposed subsection 3.1 of the Act will deny the deductibility of any loss from a business carried on by a taxpayer unless it is reasonable to expect that the taxpayer will realize a cumulative profit from that business for the period in which the taxpayer has carried on, and can reasonably be expected to carry on, that business. Whether a business will realize a profit is a question of fact that can only be determined after a review of all of the facts and documentation related to completed transactions.

Pursuant to subsection 67(1) of the Act, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances. Whether any portion of the "fee" discussed in your e-mail is deductible in computing income for income tax purposes can only be determined after a review of the actual outlays and expenses incurred by a taxpayer.

The review of whether a business will realize a profit, whether a taxpayer's chief source of income is farming and whether an outlay or expense is reasonable is the responsibility of the Verification and Enforcement Division of the local tax services office.

Subsection 237.1(1) of the Act defines a "promoter" for the purposes of the tax shelter rules contained in the Income Tax Act. A tax shelter promoter is any person who, in the course of a business, sells or issues, or promotes the sale, issuance or acquisition of, the tax shelter, acts as an agent or adviser in respect of the sale or issuance, or the promotion of the sale, issuance or acquisition, of the tax shelter, or accepts, whether as a principal or agent, consideration in respect of the tax shelter. From the information provided in your e-mail, we are unable to determine whether the "XXXXXXXXXX" would, in fact, be a tax shelter. If it is a tax shelter, the promoter is required to obtain a tax shelter registration number before any units in the shelter are sold. Furthermore, for income tax purposes, an investor is not entitled to claim any deductions prior to a registration number being issued to the tax shelter. The determination of whether the "XXXXXXXXXX" is a tax shelter, and if so, the issuance of a tax shelter registration number, is the responsibility of the Ottawa Technology Center.

The information available on the website that you make reference to in your e-mail states that an investor is investing in a "XXXXXXXXXX" and that an investor is acquiring an inventory of XXXXXXXXXX. As such, any amount paid to acquire such inventory would only be deductible, for Canadian income tax purposes, in any fiscal period of the business, to the extent that the inventory is sold during that fiscal period. The value of inventory, determined in accordance with the rules in section 10 of the Act, which remains on hand at the end of any fiscal period is not deductible, for income tax purposes, in that fiscal period.

Interpretation Bulletin IT-206R ("IT-206R") considers whether two business operations of a taxpayer are the same business. The Canada Revenue Agency view is that this determination is made based upon the degree of interconnection, interlacing or interdependence and the extent of unity between the two operations. As stated in paragraph 3 of IT-206R, the extent to which the two operations have common factors will be considered in making the determination.

Finally, subsection 111(1) of the Act outlines the Canadian income tax rules for the deductibility of non-capital losses, restricted farm losses and farm losses for a taxpayer in any particular taxation year.

Yours truly,

Olli Laurikainen, CA
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch