24 May 2012 External T.I. 2012-0441941E5 - Tax treatment of e-commerce by a sole proprietor

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 the internet business of a non-resident individual is subject to tax in Canada?

Position: In general, where a business is a sole proprietorship and not a separate entity such as a corporation, the income of the business is required to be reported by the individual in their country of residence but may also be taxed in the country in which the business is being carried on, subject to the provisions of a tax treaty. Residence of an individual is a question of fact.

Reasons: Sole proprietorship is not a separate entity.

XXXXXXXXXX
2012-044194
W. Doiron
May 24, 2012

Dear Sir/Madam:

Re: Tax treatment of an e-commerce sole proprietorship

This letter is in response to your email in which you request whether your internet business would be subject to Canadian tax based on the following facts:

• You are a deemed non-resident for purposes of Canadian taxation.
• You are currently living in XXXXXXXXXX but have no permanent address there.
• You are the sole proprietor of a small internet business. The business operates a retail website that offers products for sale from different countries. You are the sole employee of the business.
• When a client makes an order through the website, you contact the supplier for that product and the supplier delivers directly to the client.
• The website of the internet business is operated through an internet service provider located in the United States.
• You are a former resident of Canada and are planning to return to Canada permanently in the near future.

The particular situation outlined in your email appears to relate to a factual one, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.

General comments

Where a business is a sole proprietorship and not a separate entity such as a corporation, the income of the business is required to be reported by the individual generally in their country of residence but the income may also be taxed in the country in which the business is being carried on, subject to a tax treaty.. Since you have stated that you have been deemed to be a non-resident by the Canada Revenue Agency (“CRA”), we assume that you have obtained a determination of residency from the CRA. If not, we refer you to CRA’s published views on the meaning of “resident in Canada” in Interpretation Bulletin, IT-221R3, Determination of an Individual's Residence Status. This Bulletin, along with our other publications, can be accessed on our website at: http://www.cra-arc.gc.ca under the heading Publications.

As a non-resident individual, the profits of your internet business will only be taxed in Canada where it is found that the internet business was carried on in Canada and then only to the extent that the business’ taxable income was earned in Canada subject to the existence of a tax treaty. As a general matter, it is a question of fact whether a business is carried on in Canada. The essential question is whether Canada is the place of profit producing activity. When making the "in Canada" determination, we consider a number of factors. In traditional forms of business, such as the sale of goods, the most important factor is generally the place of contract. Where the business that is being carried on is a service business, the business is considered to be carried on at the place or the places where the services are performed.

It is our view that a business can be carried on in Canada without the presence of personnel in Canada because the functions of a service business can be performed electronically (i.e. the service business can be performed by using the internet to remotely provide a service or a website on a server can perform the essential functions of a service business without the presence of personnel).

Where a non-resident taxpayer is resident in a country with which Canada has a tax treaty, Canada cedes the jurisdiction to tax to the country of residence unless the business of the non-resident is carried on through a permanent establishment (“PE”) in Canada and then, only to the extent the income is attributable to the PE. In this respect, Canada generally follows the Organisation for Economic Co-operation and Development (“OECD”) Reports regarding Electronic Commerce. As in the OECD Reports, it is our view that because a web site is intangible (i.e. no location), it cannot be a PE. However, a computer server on which a website is stored can be a PE if the taxpayer owns or leases the server, the server is fixed in place and time, and the business is carried on through that server. In summary, a non-resident who presents a web site to its Canadian customers may be considered to carry on business in Canada through a PE where all of the following conditions are met:

(1) the host server is located in Canada,

(2) the business is being carried on, wholly or in part, through the operation of the web site on that server,

(3) the host server is at the non-resident's disposal,

(4) the host server is more or less permanently linked to a geographic location in Canada, and

(5) the web site is hosted by the particular computer server on a more than merely temporary or tentative basis.

Based on the facts you have provided, the above conditions have not been met and you would likely not be considered to be carrying on business in Canada. Therefore, your internet business would not be subject to Canadian taxation.

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