15 May 2008 Internal T.I. 2008-0274421I7 - Taxable Income of Non-residents

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 a not-for-profit entity can carry on a business.

Position: Generally, yes.

Reasons: See memo

 									May 15, 2008

Lorna Carlton							HEADQUARTERS
Senior Resource Officer						A. Seidel, CMA
Client Services Division					(613) 957-2058
International Tax Services Office
									2008-027442

XXXXXXXXXX

We are writing in response to your XXXXXXXXXX memorandum in which you requested our comments as to whether the XXXXXXXXXX (the "College") is "carrying on a business" in respect of its campus in XXXXXXXXXX .

Background

1. The College is a corporation XXXXXXXXXX . The College is a resident of Canada for purposes of the Income Tax Act (the "Act"). Approximately XXXXXXXXXX of the College's revenue is derived from XXXXXXXXXX . The remaining XXXXXXXXXX is derived from XXXXXXXXXX and special projects.

2. One of these special projects is XXXXXXXXXX to establish a campus of the College in XXXXXXXXXX .

3. There are XXXXXXXXXX parties involved in the development and ongoing operation of the XXXXXXXXXX campus XXXXXXXXXX . The College's two main responsibilities are the provision of the appropriate qualified staff and the administration and oversight of all campus activities XXXXXXXXXX .

4. As outlined XXXXXXXXXX , the obligations of the College include:

(a) delivery of a fully operational college campus;
(b) operation and management of the campus XXXXXXXXXX ;
(c) taking all steps necessary to ensure that programs offered at the campus are accredited academically and professionally XXXXXXXXXX ;
(d) recruitment, employment and management of all administrative personnel, faculty and staff;
(e) recruitment, admittance and enrollment of all students; and
(f) procurement and maintenance of all equipment, fixtures, systems and other supplies necessary for the continuing operation of the campus.

5. Fulfillment of the obligations under the Agreement was originally expected to generate XXXXXXXXXX . Subsequent amendments to the Agreement have expanded the services to be provided by the College and it is now estimated that this project will generate XXXXXXXXXX of profits for the College XXXXXXXXXX .

Issue

Paragraph 115(2)(e) of the Act is relevant in computing the amount of employment income that is included in a non-resident's taxable income pursuant to subparagraph 115(1)(a)(v). In this respect, clause 115(2)(e)(i)(B) excludes remuneration paid by a Canadian employer to a former resident of Canada where the payment is attributable to the duties of an office or employment performed outside Canada and the payment is made in connection with the selling of property, the negotiating of contracts or the rendering of services "in the ordinary course of a business carried on by the employer". For the purpose of applying clause 115(2)(e)(i)(B), you have asked us if the College can be considered to be carrying on a business XXXXXXXXXX ?

Analysis

"Business" is defined in subsection 248(1) of the Act to include:

"a profession, calling, trade, manufacture or undertaking of any kind whatever and, except for the purposes of paragraph 18(2)(c), section 54.2, subsection 95(1) and paragraph 110.6(14)(f), an adventure or concern in the nature of trade but does not include an office or employment;"

CRA Publications

Paragraph 4 of archived Interpretation Bulletin IT-161R3, "Non-residents - Exemption from tax deductions at source on employment income", states that:

"The remuneration received by a non-resident must be earned in connection with certain types of work performed in the ordinary course of a business carried on by the employer, its foreign affiliate, or a person with whom the employer does not deal at arm's length. In this connection, the phrase "rendering of services" is to be given its ordinary meaning and would include the performance of work or duties in respect of an office or employment. Employees of Crown corporations and Canadian agencies who are not classified as government employees will come under clause 115(2)(e)(i)(B) provided the activities carried on by the Crown corporation, the agency, or the private employer can be considered to be akin to commercial activities. However, any Canadian organization whose activities are all of a charitable or educational nature, is not normally "carrying on business" within the meaning of that term as used in clause 115(2)(e)(i)(B)."

Paragraph 7 of Interpretation Bulletin IT-496R, "Non-Profit Organizations", states that:

"It will be a question of fact to be determined with regard to the particular circumstances as to whether an association is carrying on a trade or business and if so, whether it will result in a finding that an association is not operated exclusively for non-profit purposes. Some characteristics that might indicate that an activity is a trade or business are as follows:

(a) it is a trade or business in the ordinary meaning, that is, it is operated in a normal commercial manner;
(b) its goods or services are not restricted to members and their guests;
(c) it is operated on a profit basis rather than a cost recovery basis; or
(d) it is operated in competition with taxable entities carrying on the same trade or business.

Generally, the carrying on of a trade or business directly attributable to, or connected with, pursuing the non-profit goals and activities of an association will not cause it to be considered to be operated for profit purposes."

The CRA website provides the following information under its "Policy Statements and Commentaries" for charities. It is our view that this information would also be applicable to not-for-profit organizations.

What is a "business"?

In general terms, a business involves commercial activity - deriving revenues from providing goods or services undertaken with the intention to earn profit. Factor to be considered include:

The intended course of action - If the rationale for operating a given activity is to generate a profit, then the activity is likely a business.

The potential to show a profit - Even if an activity does not yield a profit, it may nonetheless be capable of earning a profit. In determining whether a particular activity is a business, it is the intention and capacity to make a profit at some point that are relevant.

The existence of profits in past years - When the activity has been carried on for some time, a history of it returning a profit would generally imply that a business exists.

The expertise and experience of the person or organization that undertakes the activity - If the organization that is undertaking the activity has been selected for the position because of its commercial knowledge, skill, or experience, it may indicate that the activity is commercial in nature and so may be a business.

What is "carrying on" a business?

"Carrying on" a business implies that the commercial activity is a continuous or regular operation. Most fundraising events are business activities. They typically involve the sale of goods and services for the purpose of obtaining income.

Court Cases

In HMQ v Cadboro Bay Holdings Ltd., 77 DTC 5115 (FCTD), Gibson, J. stated at page 5123:

"By the subsection 248(1) definition, because there is a reference to "trade" and also to "an adventure or concern in the nature of trade", all such activities within the natural meaning of those words and as also judicially defined in the cases are included. In addition, all the other words in the subsection 248(1) definition as judicially defined are included in the meaning of "business" plus the dictionary definitions of these words."

In Louis De Villard v. MNR, 78 DTC 1047 (Tax Review Board), Mr. Tremblay (Board Member) made reference to No. 240 v. M.N.R. (55 DTC 147) where Mr. Fisher of the Tax Review Board cites the English case Re Pszon, [1946] OR 229, in which Laidlaw, J. stated at page 234:

"The word "business" is of wider import than "trade". As used in various statutes, it involves at least three elements: (1) the occupation of time, attention and labour; (2) the incurring of liabilities to other persons; and (3) the purpose of a livelihood or profit. A person who devotes no time or attention or labour, by himself or by servants or employees, to the working or conduct of the affairs of an enterprise does not carry on the business of such enterprise. He might, for instance, be only financially interested. But to carry on business he must give attentions, or perform labour, for the maintenance or furtherance of the undertaking, and devote time to the accomplishment of its objects. He must also be in such relation to the public that he may be held liable to others. The liabilities must be such as to be referable to the carrying on of the enterprise. Obligations assumed in connection with and for the purpose only of betterment of property owned by a man do not necessarily constitute him a person who carries on business. Finally, it is an essential element of carrying on business that the purpose of the engagement is for a livelihood or profit. If an enterprise is not conducted as a means to accomplish that object it does not come within the ordinary meaning of the term "business".

Mr. Tremblay went on to conclude that the courts have accepted this three part test (i.e. time, attention and labour, the purpose of profit and the incurring of liabilities to other persons) as being determinative of whether a business exists.

In John F. Timmins v HMQ, 99 DTC 5494 (FCA), Noel, J.A. made the following comments at page 5497:

"It is important to note at the onset that the conclusion reached by the Trial Judge does not hinge on the fact that the Department, as a component of the government of New Brunswick, was not subject to taxation nor does it rest on the suggestion that governments cannot, in principle, carry on business. Rather, the conclusion is that in order for a specified employer to have "carried on business" ... it must have had profit as a predominant purpose for entering into the contract. ... In my view, the Trial Judge erred when he sought to apply this test under the Act."

"The expressions "carry on business", "carrying on business" or "carried on business", while undefined must, when regard is had to the ordinary meaning of the words, refer to the ongoing conduct or carriage of a business. It would seem to follow that where one "carries on" a business in the ordinary sense, or by pursuing one or more of the included activities under subsection 248(1), over time, one is "carrying on business" under the Act."

"Whether one reads the definition of "business" ... as a definition or as something else, it inescapably brings within the meaning of this word the specific activities which it lists. The result is that profits generated by the carriage of these activities are, for purposes of the Act, business profits and taxable as such. While ... section 122.3 does not impose a tax but extends a benefit, it cannot be seriously argued that on that account only, the word business should be construed differently. There is nothing in the language of the subsection which excludes from its application the defined meaning of the word "business".

Applying this definition, it seems clear that even if it could be said that the Department was not carrying on a business in the ordinary sense, it was at least engaged in an "undertaking of any kind whatever", namely the provision of services under a contract for a fee. As such it was carrying on business under a contract.

In my view, the Trial Judge ignored the definition set out in subsection 248(1) when he held that business could not be "carried on" ... in the absence of a predominant profit motive. The definition reflects no such requirement. Although the word "business", when used in the Act, must generally envisage an activity capable of giving rise to profits, it does not require that this activity be undertaken or carried on for the "predominant" purpose of earning a profit. To incorporate such a requirement into the Act would severely curtail its reach insofar as the taxation of business profits is concerned."

In HMQ v. Bastion Management Ltd, 94 DTC 6272 (FCTD), at page 6275 Reed, J. referred to Rip, TCJ's comments in British Columbia Telephone Company v. MNR, 86 DTC 1286 (TCC):

"Although the Courts have considered the term "ordinary course of business" on many occasions, only a very few cases are of assistance in this appeal. The term used in subsection 20(1)(gg) is not "ordinary course of business", but "ordinary course of the business", that is, the ordinary course of the business carried on by the taxpayer."

...

"In a bankruptcy matter before the High Court of Australia, Rich, J. wrote that for transactions to be considered in the ordinary course of business supposes "that according to the ordinary and common flow of transactions in affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done; that it should form part of the ordinary business as carried on, calling for no remark and arising out of no special or particular situation". (Downs Distributing Co. Pty., Ltd. v. Associated Blue Star Stores Pty., Ltd. (In Liquidation))."

Reed, J. then concluded that "I accept this as a proper interpretation of the phrase "in the ordinary course of the business" in paragraph 20(1)(gg)(ii)."

In Keith James Betteridge v. HMQ, 99 DTC 3486 (TCC), Rip J. stated that "all Canadian universities do in fact engage in business activities, like operating bookstores, parking lots, residences and cafeterias" and then concluded that "while the revenues from such activities may not be taxable since universities are exempt from tax, this does not alter the fact that universities earn revenue by commercial means".

Generally, the courts will consider a taxpayer to be carrying on a business if the taxpayer is undertaking a commercial activity on a regular or continuous basis and that activity has the potential of producing a profit. Accordingly, the determination of whether the operation of its campus XXXXXXXXXX constitutes the carrying on of a business by the College requires an analysis of the purpose of this special project and an examination of the actual activities carried on at that campus. XXXXXXXXXX . In our view, the following factors are relevant to the determination of whether the College is carrying on a business XXXXXXXXXX :

• The College's articles of incorporation permit it to raise revenue through special projects.
• The XXXXXXXXXX qualifies as such a special project.
• The special project constitutes "an undertaking of any kind whatever" within the meaning of "business" in subsection 248(1) of the Act.
• XXXXXXXXXX it is an activity that is carried out on a regular and continuous basis over a period of time.
• The obligations of the College are consistent with those of a college that would be carrying on such an activity for profit.
• The operation of the campus XXXXXXXXXX will, in fact, generate profits for the College.
• XXXXXXXXXX

Conclusion

Based upon the information you have provided to us, it is our view that the operation of its campus XXXXXXXXXX constitutes a business carried on by the College. Accordingly, any employees of the College who are former residents of Canada and who render services in the ordinary course of the operation of the College's campus XXXXXXXXXX would be persons described in clause 115(2)(e)(i)(B) of the Act.

We hope that our comments are of assistance. If you wish to discuss any of the above, please contact the writer.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch