27 April 2012 External T.I. 2011-0429361E5 - India non-resident activities in 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 a corporation resident in India which contracts out advertising services in Canada for the sale of condos located in India through an independent Canadian company is liable for Canadian income taxes?

Position: Question of fact but likely no.

Reasons: Would likely not be considered to have a permanent establishment under the Canada-India Tax Treaty.

XXXXXXXXXX
									2011-042936
									W. Doiron
April 27, 2012

Dear XXXXXXXXXX:

Re: Non-resident activities in Canada

This letter is in response to your letter in which you ask whether a corporation resident in India (the “Taxpayer”) is subject to Canadian income tax based on the following facts:

• The Taxpayer’s business is residential development in India.
• The Taxpayer does not have an office in Canada.
• The Taxpayer would like to advertise in Canada the sale of condos located in India.
• The Taxpayer intends to contract out media placement services to a Canadian corporation (“Canco”). The contract would require Canco to place advertisements throughout Canada.
• Any party wanting more information regarding the Canadian advertisements would contact Canco.
• If the party is interested in purchasing a condo in India, Canco would direct the party to contact the Taxpayer directly and the purchase/sale agreement would be transacted in India by the Taxpayer.
• Canco is not an agent for the Taxpayer and does not have the authority to conclude contracts.
• Canco is owned by one shareholder who is not related in any way to the Taxpayer.
• Canco has several contracts besides this potential contract with the Taxpayer.

General comments

Liability for Canadian Tax

While not specifically stated in your letter, it is presumed that the Taxpayer is incorporated in India and its mind and management is located in India. As a result, the Taxpayer would be considered a resident of India and therefore treated as a non-resident person under the Income Tax Act (“ITA”). In general, pursuant to paragraph 2(3)(b) of the ITA, a non-resident person who carries on a business in Canada is liable to pay Canadian income tax on its taxable income earned in Canada. The determination of whether a non-resident is “carrying on business in Canada” is always a question of fact and is based on factors which have been developed through case law.

Section 253 of the ITA provides for an extended meaning of ‘carrying on business in Canada’ and states in paragraph 253(b) that where a person who is a non-resident person “solicits orders or offers anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada”, the person shall be deemed, in respect of the activity or disposition, to have been carrying on business in Canada in the year. In this case, you have stated that Canco is not an agent or servant, therefore, paragraph 253(b) would not apply.

If it is determined that the Taxpayer is carrying on a business in Canada, the Taxpayer would be liable for income tax on its taxable income earned in Canada for the year determined in accordance with section 115 of the ITA .

In accordance with the Agreement Between The Government of Canada and The Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income and on Capital (“Canada-India Tax Treaty”), the business income of a non-resident person is generally taxable only in its country of residence, unless the person has a permanent establishment (“PE”) in the other country. Pursuant to paragraph 1 of Article 7 of the Canada-India Tax Treaty, the business profit of a resident of India shall be taxable only in India unless the resident carries on business in Canada through a PE situated in Canada. Where a Canadian PE exists, the resident of India will be taxed in Canada on the business profits attributable to that PE.

Existence of a PE

Generally speaking, Article 5 of the Canada-India Tax Treaty provides the conditions that, if met, will cause a place of business in the Other Contracting State to constitute a PE, or in some cases deem the resident of a Contracting State to have a PE in the Other Contracting State. An actual determination of the existence of a PE in Canada is always a question of fact, and would only be made after a thorough review of all the relevant facts. However, based on the information provided, it is likely that the Taxpayer would not be considered to have a PE in Canada under Article 5 of the Canada-India Tax Treaty and, as a result, the Taxpayer would not be liable to pay Canadian income taxes on the offering for sale of condos located in India.

We trust these comments will be of some assistance.

Yours truly,

Lita Krantz
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch