2 July 1991 Ruling 911291 F - International Shipping Corporations

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.

Dear Sirs:

Re:  International Shipping Corporations

This is in reply to your letters dated May 6 and June 20, l99l concerning paragraph 81(1)(c) of the Canadian Income Tax Act (the "Act") and the proposed amendment of the Act by the addition of subsection 250(6) as described in Clause 194 of Bill C-18 tabled by the Minister of Finance on May 30, l99l (proposed subsection 250(6)").

The numbered paragraphs set forth below correspond to and address the questions submitted by you in the like numbered paragraphs of your letter of May 6.

l.     You have asked us to comment on the following statements set forth in your letter of May 6:

      "Assume that a Canadian corporation ("Canco") incorporates a wholly-owned international shipping corporation ("ISC").  Assume further that the ISC is formed under the laws of a country other than Canada, and will be deemed, once proposed subsection 250(6) to the Act is enacted, to be a resident in its country of incorporation and not to be resident in Canada.  Finally, assume that the ISC establishes a permanent establishment in Canada, with the employees of the Canadian branch providing commercial ship management (obtaining contracts of affreightment, time or voyage charter revenues, etc.) and/or technical ship management (crewing of vessels, insurance, maintenance, repairs, etc.).  The vessels which are owned or chartered in by the ISC are operated in international traffic (within the meaning of that term in section 248 of the Act and proposed subsection 250(6) of the Act). Should the ISC sell a vessel and realize a capital gain, one could argue that, in the absence of possible treaty exemption, the ISC would be taxable under Part I of the Act, as having realized a taxable capital gain from the disposition of a capital property used in carrying on a business in Canada (subparagraphs 115(1)(a)(iii) and 115(1)(b)(ii) of the Act)."

In respect of the foregoing, you request our view as to whether the capital gain realized by the ISC could be taxable under the Act.

Our Comments

Proposed subsection 250(6) is intended merely to clarify the residency of corporations engaged in international shipping.  The proposed amendment does not purport to, and in our opinion will not, amend the substantive law concerning the taxation of non-residents.

In our opinion, paragraph 81(1)(c) of the Act does not apply to capital gains.

Whether a particular asset is capital property used by a person in carrying on a business (other than an insurance business) in Canada such that the asset is "taxable Canadian property" by virtue of subparagraph 115(1)(b)(ii) of the Act is essentially a question of fact that can only be answered after determination and consideration of all relevant facts pertaining to the particular case under consideration.

2.     You have requested our views as to whether the Liberian Annual Tonnage Tax is a "capital tax" on vessels within the meaning of that term in proposed paragraph 181.4(d) of the Act as set forth in the Draft Legislation to Amend the Income Tax Act and Related Statutes issued by the Minister of Finance on February 18, 1991 (the "Technical Amendments").

Our Comments

You have provided only very limited extracts of the Liberian legislation pursuant to which the Liberian Annual Tonnage Tax is imposed.  Without further information concerning the Liberian tax, including a copy of all relevant Liberian legislation, we are unable to formulate an opinion as to whether this Liberian tax is a "capital tax".

We can, however, observe that if the Liberian Annual Tonnage Tax is only imposed in respect of vessels registered under the Liberian legislation and if there is no obligation upon corporations resident in Canada carrying on international shipping operations in Liberia to register their vessels under such Liberian legislation and thereby subject their vessels to the Liberian Annual Tonnage Tax, we would not consider the Liberian Annual Tonnage Tax to be a "capital tax" for purposes of proposed paragraph 181.4(d) of the Act.

3.     You have requested our confirmation that proposed subsection 250(6) will also apply for purposes of the Income Tax Regulations.

Our Comments

Unless and except to the extent an Income Tax Regulation specifically otherwise provides, proposed subsection 250(6) will apply for the purposes of such Regulations.

4.     You have requested our view as to whether a corporation to which proposed subsection 250(6) applies may be considered for purposes of the Act to be resident contemporaneously in the country in which it is incorporated and another country.

Our Comments

Proposed subsection 250(6) deems a corporation that is subject thereto to be resident in the country in which it is incorporated and not to be resident in Canada.  It does not, however, deem such corporation to be resident only in the country in which it is incorporated.  A corporation may be resident in more than one jurisdiction at the same time. Accordingly, we will interpret proposed subsection 250(6) as not precluding a corporation from also being considered to be resident in a foreign country other than that in which it is incorporated.  We observe that Regulation 5907(1)(a), for example, contemplates that a nonresident corporation may be resident in more than one foreign country at any particular time.

5.     You have requested our views as to the application of paragraph 81(1)(c) and paragraph 250(6) to the chartering of vessels.

Our Comments

(i)     Paragraph 81(1)(c) and proposed subsection 250(6) may apply to a corporation that leases in or charters from other persons, on a bareboat or on a time charter basis, the vessels it operates.

(ii)      Revenue from time or voyage charters may qualify for purposes of paragraph 81(1)(c) and proposed subsection 250(6).

(iii)     Revenue received under a contract of hire that is a dry lease or bareboat charter of a vessel does not constitute revenue or income from the operation of the vessel.

6.     You have inquired concerning our interpretation of the proviso in paragraph 81(1)(c) that it only applies "if the country where the person resided grants substantially similar relief for the year to a person resident in Canada."

Our Comments

It is the Department's position that the proviso in paragraph 81(1)(c) that the provision only applies "if the country where the person resided grants substantially similar relief for the year to a person resident in Canada" will be satisfied if:

(i)       such foreign country simply does not impose an income tax, or

(ii)     the income of persons resident in Canada from the operation of a ship or aircraft in international traffic is exempt from tax in such foreign country by virtue of domestic tax legislation of such country or by tax treaty between such foreign country and Canada.

7.     You have asked for our views as to where the earnings of a nonresident corporation attributable to a permanent establishment situated in Canada will be attributed under Regulations 5906 and 5907 if such earnings are exempt from tax in Canada by virtue of paragraph 81(1)(c).

Our Comments

Notwithstanding that a foreign affiliate carries on its business through a permanent establishment situated in Canada, by virtue of Regulation 5906(1)(b), none of the income that is exempt from Canadian tax under paragraph 81(1)(c) shall be attributable to a Canadian permanent establishment for purposes of Part LIX of the Regulations.  If the foreign affiliate has a permanent establishment in respect of its international shipping business in the country in which it is resident, its income (that is exempt from Canadian tax) that would be attributable to its permanent establishment in Canada (but for Regulation 5906(1)(b)) shall, by virtue of Regulation 5907(1)(a), be deemed to be attributed to the permanent establishment in the country in which it is resident.  If the foreign affiliate has no permanent establishment in respect of its international shipping business in the country in which it is resident, the income (that is exempt from Canadian tax) that would have been attributable to its permanent establishment in Canada (but for Regulation 5906(1)(b)) shall not be attributed to any country and will be included in pre-acquisition surplus.

In addition to the foregoing 7 questions that you raised in your letter of May 6, when we met with you in May, you raised the question of whether, where a foreign affiliate that carries on an active business principally through a permanent establishment in Canada the income from which is exempt from tax under Part I of the Act by virtue of paragraph 81(1)(c) charters on a bareboat basis a vessel from another related foreign affiliate that does not carry on an active business, the rent/charter hire paid under the charter will be deemed to be included in the active business income of the payee/lessor (and thus not be FAPI of the payee/lessor) by virtue of paragraph 95(2)(a)(ii) on the grounds that it is included in computing the amount prescribed to be the payor's earnings from an active business other than a business carried on by it in Canada.

Regulation 5906(1) provides that for purposes of Part LIX of the Regulations a foreign affiliate that carries on an active business shall be deemed to carry on that business in Canada only to the extent its income therefrom is subject to tax under Part I of the Act.  Income to which paragraph 81(1)(c) of the Act applies is not subject to tax under Part I of the Act.  Therefore, for purposes of determining the amount prescribed to be its earnings from an active business other than a business carried on by it in Canada, income to which paragraph 81(1)(c) applies is deemed not to be from an active business carried on in Canada and the limitation in subparagraph 95(2)(a)(ii) to the effect that such provision does not apply when the amount is deductible in computing the amount prescribed to be the payor's earnings from a business carried on by it in Canada is not applicable.

General

Our comments above with regard to proposed subsection 250(6) are premised on the assumption that such provision is enacted. Nothing herein should be construed as constituting an assurance or representation that proposed subsection 250(6) or any other proposed amendment of the Act will be enacted.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch