8 July 1992 Income Tax Severed Letter 9218145 - Treatment of Sale of Inventory by a Non-Resident

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.

921814
24(1) K.B. Harding
957-2111

July 8, 1992

Dear 19(1)

Re: Sale of Inventory Property

This is in reply to your letter of June 10, 1992 wherein you indicated

24(1)

You requested a response to the following questions.

• (1) If a Canadian company buys property in Canada and sells it to a purchaser outside Canada (that is, the company is a wholesaler): (a) what portion of the income from the sale is subject to foreign income tax; and (b) if the income is subject to foreign income tax, how is the amount of the tax credit which Canada allows determined? In particular, does the source of the income from the sale affect the amount of tax credit allowed, and, if so, how is the source of that income determined?

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• (2) If a Canadian company manufactures property in Canada and sells it to a purchaser outside Canada, how would the answers to the questions in 1 be different?
• (3) If the company in questions 1 and 2 were not Canadian but a foreign company with a Canadian office (a Canadian Branch), how would the answers to questions in 1 and 2 be different?
• (4) If a foreign corporation resident in a country with which Canada does not have an income tax treaty (along the lines of the OECD Model) imports property into Canada, what portion of the income from the sale in Canada is subject to Canadian tax? Would the answer depend upon whether the corporation had an office in Canada or sold in Canada through an independent distributor?

We will respond to your questions in the order set out above.

(A) Where a Canadian company sells property outside Canada,
it will be necessary to determine, based on the facts
of the particular case, whether or not the Canadian
company carries on business in the foreign country .

• Where the Canadian company is not carrying on business in the foreign country, no income will be considered to be derived from sources in the foreign country. If the foreign country levies an income or profits tax on such sales, the Canadian taxpayer will be permitted to deduct the tax paid to the foreign country in determining its income for the year. No foreign tax credits are available is such situations.
• Where the Canadian company is carrying on business in the foreign country, taking into account the circumstances of a particular case, a reasonable portion of the profits of the Canadian company will be allocated to that foreign branch. While Canada will tax the income of the branch, the Canadian company will be granted a foreign tax credit on the profits sourced to the foreign country equal to the lesser of the foreign tax paid and the Canadian tax paid on that income in Canada.

Under the Canadian taxation system, a separate foreign tax credit is calculated on business and non-business sourced income and on a country by country basis. We are enclosing

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copies of Interpretation Bulletins IT-270R2 and IT-395R which deals with Canadian foreign tax credit and sourcing rules.

Under a tax convention or agreement, which is similar to the OECD Model, Canada will apply the provision of the "Business Profits" article where the Canadian company carries on business in the other Contracting State through a permanent establishment. Where business profits are allocated to that permanent establishment in the foreign country, Canada will permit the Canadian company to claim a foreign tax credit, to the extent permitted under the Act, to provide relief from double taxation.

(B) The responses to question 2 would be the same as for
question 1, however, because the Canadian company
manufactures the product, the profits earned by the
Canadian company would probably be different but the
amount allocated to the business carried on in the
foreign country would be similar.

(C) The response to questions 1 and 2 would not change in
the situation where you substitute a branch of a
foreign company for a Canadian company. With respect
to the sourcing of income to Canada the response would
be the same and the amount of income sourced to Canada
would be what is reasonably considered to be
attributable to the business activity in Canada

(D) Where a corporation, which is resident in a country
with which Canada does not have an income tax treaty
(similar to the OECD Model), imports property into
Canada, a reasonable portion of the profits of that
foreign company must be allocated to Canada where the
foreign company is considered to be carrying on
business in Canada. The profits allocated to the
portion of the business carried on in Canada will be
considered for Canadian purposes to be sourced in
Canada.

Where the foreign corporation sells its products in
Canada through an office, it would be considered to
carry on business in Canada. Therefore, such a
corporation would be taxable in Canada in respect of
amounts which would reasonably be considered
attributable to that office.

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• If the foreign company, which does not itself carry on business in Canada, sells its product in Canada through a distributor and the distributor is not an agent of the company, the company will not be taxable in Canada on any portion of its profits.

We are also enclosing a copy of Information Circular 87-2 which provides guidelines for transfer pricing in Canada. Also enclosed is a copy of the relevant sections of the Income Tax Act which are applicable to non-residents of Canada in the above described situations.

If you wish to discuss the matter verbally you may contact either Mr. Ken Major at (613) 957-2124 or the writer at 957- 2111. We trust these comments are adequate for your purposes.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

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