16 October 1986 Income Tax Severed Letter 5-1776 - [861016]

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.

XXXX M. Carsley (613) 957-2116

October 16, 1986

Dear Sirs:

This is in reply to your letter of June 2, 1986 in which you requested our opinion as to whether a U.S. company would be taxable in Canada in the situation described below:

1. An American company purchases widgets from a Canadian manufacturer.

2. The American company was incorporated and is resident in the U.S. It does not have a permanent establishment in Canada.

3. To avoid Canadian made goods being shipped to the U.S. for storage and then reshipped back to Canada, the Canadian manufacturer ships the widgets to a warehouse in Canada which is rented by the American company. Customers wishing to purchase these widgets place their order with the American company in the U.S.A. The American Company contacts the warehouse and arranges to have the widgets shipped to the Canadian customer.

4. The American company invoices the customer and collects the money.

It is our opinion that, in the situation described above, the American company would be carrying on business in Canada pursuant to section 253 of the Income Tax Act (the "Act"). If the warehouse is used solely for the storage and delivery of goods owned by the American company, the rental of the warehouse would not, in and of itself, deem the American company to have a permanent establishment in Canada pursuant to Article V(6) of the Canada-US 1980 Tax Convention (the "Treaty"). Therefore, the business profits earned by the American company would not be subject to tax in Canada by virtue of Article VII(1) of the Treaty. It should be noted that the determination of whether a company has a permanent establishment is an annual test that can only be made after the fact; if the situation described above changes or if the facts provided are incomplete the American company could be taxable in Canada.

If the American company opened a Canadian bank account, deposited cheques into that account and used that account to pay expenses such as rent for the warehouse or payments to the Canadian manufacturer for widgets our opinion as stated in the previous paragraph would not change.

With respect to your question on filing requirements, we do not normally require that a company file a tax return where it is exempt from tax in Canada pursuant to Article VII of the Treaty.

We wish to stress that the expression of an opinion is not a ruling and is not binding upon Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R.

We trust this information will be of assistance for you.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch