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.
May 31, 1993
E.E. Campbell |
Rulings Directorate |
A/Director |
G.D. Middleton 957-2122 |
Provincial and International Relations Division |
Attention: Karen Caspersen
Request from XXXXXXXXXX
We are replying to your memorandum of May 5, 1993 in which you requested our opinion with respect to the questions asked by XXXXXXXXXX, in his letter of April 29, 1993. We understand that XXXXXXXXXX would like to know what the Canadian tax implications would be in respect of the following situation.
XXXXXXXXXX
XXXXXXXXXX
Unfortunately, there is insufficient facts and information for us to give any definite answers to XXXXXXXXXX's questions. In order for us to make a proper determination, we would need to see the actual agreements between the
XXXXXXXXXX
Nevertheless, we offer the following general comments concerning the Canadian tax implications for this situation.
1. With respect to Part I tax, it would be necessary to determine whether the XXXXXXXXXX is "carrying on business" in Canada. Some of our views on the meaning of "carrying on business" are:
- Subsection 248(1) of the Act defines "Business" and section 253 of the Act provides an extended meaning of "carrying on business".
- Some of the criteria the courts consider relevant to make a determination on whether a person is carrying on a business or trade are:
1. where the contract which is the basis of the transaction is made;
2. where the goods are delivered or payments are made;
3. where the business assets are located;
4. whether an agent or independent contractor is utilized;
5. where the operations take place from which the profits in substance arise (as opposed to where profits are realized);
6. the nature of the activities/transactions;
7. the establishment of a bank account, listed telephone number or address;
8. whether the reason for compliance with a jurisdiction's rules and relations is business - or legally - motivated;
9. whether the taxpayer intended to do business in Canada;
10. place where the assets used in the business are purchased;
11. the degree of supervisory or other activity in Canada;
12. the substance or object of the transaction;
13. the presence of a representative or resident expert;
14. whether activities in Canada are merely ancillary to the main business (e.g., the business of buying, storing, selling or manufacturing the product);
15. whether individuals in Canada assist (or are available to assist) the taxpayer in his endeavour;
16. the reason for the taxpayer's existence; and
17. how "the reasonable man" would answer this question.
- The jurisprudence stresses that each situation must be decided on its own facts and a definitive test does not exist.
- A review of Canadian and U.K. jurisprudence indicates that Canadian courts have interpreted this concept of "carrying on business" (as opposed to merely trade) in a broader fashion than the U.K. courts. Our courts generally first determine whether section 253 of the Act applies and, if not, they then turn to the common law and the criteria described above (section 253 of the Act may have been enacted for greater certainty). It is our view that, although, in the absence of other evidence, the criterion described in # 1 above may be decisive, the one factor that may be most determinative of this issue is "the reasonable man" test. In sum, the words "carrying on business in Canada" do not appear to be interpreted by our courts in a technical sense; instead, they are interpreted in a common sense fashion, based on commercial reality.
- Paragraph 26 of Interpretation Bulletin IT-270R2 states that: "A determination of the place where a particular business (or a part thereof) is carried on necessarily depends upon consideration of all the relevant facts, but has been stated in general terms to be the place where the operations in substance take place. In determining where a particular type of business is carried on, the Department usually relies on the following guidelines:
(a) Development and sale of real property - the place where the property is situated;
(b) Merchandise trading - the place where the sales are habitually completed, but other factors such as the location of the stock, the place of payment or manufacture may be considered relevant in particular situations;
(c) Trading in intangible property (e.g., stocks and bonds) - the place where the purchase or sale decisions are normally made;
(d) Money lending - the place where the loan arrangement is in substance completed;
(e) Personal property rentals - the place where the property available for rental is normally located;
(f) Real property rentals -the place where the property is situated;
(g) Service - the place where the services are performed."
- Paragraph 27 of Interpretation Bulletin IT-270R2 states that: "In the case of a single business comprising more than one of the above mentioned activities, each segment is considered separately in determining in which country or countries the business is carried on. An exception is made in the case where one activity is clearly incidental to a predominant one; e.g. a vendor of machinery providing the services of an engineer to supervise installation of machinery sold."
2. If the XXXXXXXXXX is considered to be carrying on business in Canada, the next step would be to determine whether the XXXXXXXXXX has a permanent establishment in Canada pursuant to Article V of the Canada-Belgium Income Tax Convention (the "Convention"). The 1992 OECD Commentary for Article 5 provides some guidelines for the meaning of "fixed place of business" and "place of business":
(a) Fixed Place of Business
Main Conditions:
- There must be a "place of business".
- The place of business must be fixed. (i.e. must have a degree of permanence)
- The business must be wholly or partly carried on through the fixed place of business.
(b) Meaning of "Place of Business"
- "A place of business covers any premises facilities or installations used for carrying on the business ...."
- "A place of business may also exist where no premises are available or required for carrying on the business of the enterprise and it simply has a certain amount of space at its disposal."
- "It is immaterial whether the premises, facilities or installations are owned or rented by or are otherwise at the disposal of the enterprise..."
- "The place of business may be situated in the business facilities of another enterprise."
- "This may be the case, for instance, where the foreign enterprise has at its constant disposal certain premises or a part thereof owned by the other enterprise."
This use of space concept has been accepted by the Department of Finance.
3. It would also be necessary to determine whether all, or a portion, of the payments made by the XXXXXXXXXX are subject to Part XIII tax by virtue of paragraph 212(1)(d) of the Act. Interpretation Bulletin IT-303, together with the Special Release to IT-303, and Information Circular 77- 16R4 set out the Department's views on payments subject to Part XIII tax.
4. If the payments in 3. above are subject to Part XIII tax, it is then necessary to determine whether the payments fall under the definition of "royalties" in paragraph 4 of Article XII of the Convention. If the payments are covered by Article XII, the Part XIII tax will be reduced to 10%. If they are not "royalties" under Article XII of the Convention, the payments would fall under Article VII of the Convention as "business profits" of the XXXXXXXXXX and such payments may be exempt from Canadian tax if the actual facts indicate that the XXXXXXXXXX does not have a permanent establishment in Canada.
5. In summary, if the XXXXXXXXXX can establish that it does not have a permanent establishment in Canada and that the payments, as described in 3. above, are not "royalties" (for example, payments for services) under Article XII of the Convention, such payments may be exempt from tax in Canada.
As mentioned above, since we do not know all of the facts in this particular situation, we are not able to provide you with any definite views on whether the XXXXXXXXXX would be liable for Canadian income taxes under Part I and/or Part XIII of the Act.
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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