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.
911881
24(1) T.B. Kuss
(613) 957-2117
Attention: 19(1)
July 2, 1992
Dear Sirs:
Re: 24(1)
This is in reply to your letters dated July 10, August 22 and September 11, 1991 regarding the above matter. We apologize for the lengthy delay in responding. As you are aware, we have sought the comments of the Department of Finance regarding various policy issues pertaining to subsection 250(6).
While we are not, at this time, in a position to provide comprehensive answers to all of your questions we expect that our comments will be useful and will serve as a basis for future dialogue.
Our comments are general in nature. The application of these provisions to a particular case can only be made after thorough consideration of all of the relevant facts pertaining to that situation. Where possible, we have tried to extend our comments somewhat beyond the situations you described as we expect this will be of assistance to you.
All of your questions focus on the meaning of the phrase "the operation of ships" within the context of subsection 250(6). There are a number of ways to approach this issue, however we feel it makes sense to describe situations that, in our view, clearly do and do not constitute the "operation of ships" within the meaning of subsection 250(6) and then deal with a number of situations that fall somewhere in between.
As a starting point, it is our view that a company will be considered to be engaged in the operation of a ship where: it owns, crews, and arranges passengers or cargo to transport on that ship for its own account; it charters out a ship that it owns or has bareboat chartered in, and has crewed, to another person; it charters in a ship from another person but crews it itself and arranges passengers or cargo to transport on the ship for its own account; or it charters in a ship, with crew, from another person but has, for a specified period or number of voyages, the right and responsibility to arrange passengers or cargo for its own account.
A company that owns and operates a ship can be regarded as being involved in a number of discrete activities: raising capital and debt financing; overseeing new construction, acquisitions and dispositions; crewing and catering; performing repairs and maintenance; arranging insurance; marketing; negotiating charters; arranging voyages and soliciting passengers or cargo; and stevedoring. All of these activities are appropriately characterized as constituting the operation of ships when undertaken as part of an integrated business that is carried on in the same corporation for its own account. In our view, it was not intended that any of these activities would be so viewed when undertaken separately. For example, neither a bank that lends money to acquire ships, a shipbuilder, a seamen's employment agency, a shipping insurance company, a cruise line travel agent, nor a dockside cargo handling firm is intended to be treated as being in the business of operating ships.
There can, of course, be situations in which a corporation is engaged in more than one business, and it would not be surprising to find a company that, for example, operated its own line of ships while also running a cargo handling operation for other shipowners. If, in fact, that cargo handling operation had developed to a stage where it was beyond any reasonable requirements of the company's own ships, it would seem appropriate to treat it as a separate business and, in the context of the question at hand, to exclude those revenues arising in connection with cargo services provided to the other shipowners. If, however, the cargo handling facilities were established and used for the company's own ships, with its services being provided to others only on the odd occasion that the company did not require them for its own use, we would not regard the operation as a separate business and would not propose to exclude any of its revenues from the company's operation of ships.
Where assets are risked or employed in the corporation's integrated shipping business the income therefrom would generally be considered to be from the operation of ships. There may be situations where the intended use of a vessel can not be fulfilled due to economic or other events that could not be reasonably foreseen. For example, with respect to the sub- leasing of ships, where a ship is time chartered in for the purpose of being used by the lessee in its integrated shipping business, and due to subsequent events the vessel can not be so used, revenue from sub-time chartering out the vessel on a temporary basis would normally be considered to be from the operation of ships, provided that the vessel would be returned to its intended use as soon as is reasonable in the circumstances. The sub-leased vessel would still be considered risked or employed in the corporation's integrated shipping business. While, in these circumstances, the sub-leasing revenue would be considered from the operation of ships, in any case where the sub-time chartering activity constitutes a separate business the revenue therefrom would not be considered to be from the operation of ships.
Where a ship is owned or bareboat chartered in by a corporation and such ship is bareboat chartered out or sub-bareboat chartered out, as the case may be, revenue therefrom will not normally be considered from the operation of ships. Where, however, the corporation's leasing activities do not constitute a separate business and the ship was originally acquired or bareboat chartered in to be used in its integrated shipping business to transport passengers or goods and, due to subsequent events, the ship can not be so used and is bareboat chartered out or sub- bareboat chartered out on a temporary basis, provided the vessel was to be returned to its intended use as soon as is reasonable in the circumstances, the revenue therefrom would be considered to be from the operation of ships. Again, the vessel would still be considered risked or employed in the corporation's integrated shipping business.
Gross revenue from other property not employed or at risk (i.e. not committed) in the corporation's integrated shipping business, for example, interest on term deposits that are not required for use in the business, will not be considered to be gross revenue from the operation of ships.
Income from shipbroking will not be considered income from the operation of ships.
While the income of a corporation may be from the operation of ships, where a corporation's integrated shipping business consists of both the operation of ships that are used primarily in transporting passengers or goods in international traffic, within the meaning of paragraph 250(6)(a), ("qualifying operations") and the operation of ships that are not so used ("non-qualifying operations"), each of the qualifying and non- qualifying operations will be considered to be a separate business. The qualifying operation must be the principal business of the corporation if the test in paragraph 250(6)(a) is to be satisfied.
Gross revenue of an integrated shipping business from bareboat chartering out or sub-time chartering out a vessel, that is included in the gross revenue from the operation of ships in accordance with the above comments, provided the vessel was acquired to be used in international traffic, will be "qualifying gross revenue" for purposes of paragraph 250(6)(b).
Any gross revenue from the operation of ships by the corporation in its own right in other than international traffic within the meaning of paragraph 250(6)(a) and rental revenue from the leasing out or sub-leasing out of ships acquired or leased in to be used primarily in the transportation of passengers and goods in other than such international traffic, will not be qualifying revenue for purposes of paragraph 250(6)(b).
We would also add that, in our view, the phrases "operation of ships" in subsection 250(6) and "operation of a ship" in paragraph 81(1)(c) have the same meaning.
We hope our comments are of assistance.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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