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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
942171
XXXXXXXXXX S. Leung
Attention: XXXXXXXXXX
February 28, 1995
Dear Sirs:
Re: Subparagraph 219(2)(b)(ii) of the Income Tax Act (the "Act")
We are writing in response to your letter of August 23, 1994 wherein you requested a technical interpretation of the terms "communications" and "principal business" as used in paragraph 219(2)(b) of the Act and our view as to whether a non-resident corporation's principal business in the two scenarios described in your letter would be communications for the purpose of subsection 219(2) of the Act. We also acknowledge the additional information you provided in your facsimile letter of January 25, 1995.
The first scenario outlined in your letter pertains to a situation where a non-resident corporation sets up a branch in Canada (the operations of which constitute all the activities of the corporation) to provide telecommunication services including but not limited to local and international telephone, data and facsimile services. In order to offer such services the corporation registers itself as a long distance retailer under the Canadian Radio-Television and Telecommunications Commission (the "CRTC") as a seller of telecommunication services and pre-purchases a block of capacity or time from local licensed Canadian transmitters at a discount to provide telecommunication services to its customers at a lesser discount. It also provides value added services to its customers such as supplying prepaid calling cards, voice mail, data storage and call forwarding. All of its profits and revenue are derived from the activities described above and all of its asset value, capital employed and time, attention and effort expended by its employees, agents or officers are directed towards such activities.
The situation in the second scenario is the same as that in the first scenario with the addition that the corporation provides other services such as reselling, installing and servicing communication apparatus owned by either its customers or itself. For example, the corporation may acquire personal computer equipment and add telecommunication services hardware and software, such as an international phone/data line package and a facsimile modem card, to enable the personal computer to be used for telecommunications. It charges its customers for use of the telephone lines. Such activities are minimal and are value added activities only. The majority (i.e. more than 50%) of the corporation's profits and revenue are derived from those activities described in the first scenario and the majority of its asset value, capital employed and time, attention and effort expended by employees, agents or officers are directed towards those activities.
The situations outlined in your letter appears to relate to actual situations involving identifiable taxpayers. Accordingly, you should consult the applicable District Taxation Office and provide them with the facts of the actual situations for their determination as to whether the non-resident corporation's principal business is communications. However, we can offer the following general comments.
The word "communications" is not defined in the Act. The Dictionary of Canadian Law defines communications as (1) a method, manner or means by which information is transmitted, imparted or exchanged and includes the transmission and reception of sound, pictures, signs, signals, data or messages by means of wire, cable, waves or an electrical, electronic, magnetic, electromagnetic or optical means; (2) the business of radio and television broadcasting and the furnishing of community antenna services, telephone services and other electrical or electronic communication services.
When determining whether a business is "communications" for purposes of subparagraph 219(2)(b)(ii) of the Act, we suggest that references be made to the Telecommunications Act, the Radiocommunication Act and the Broadcasting Act. The communication and telecommunication industry is regulated by the Federal government through the CRTC. Such statutes provide some insight as to the types of communication and telecommunication activities that are regulated and subject to licensing requirements.
Whether a taxpayer is in the business of communication is a question of fact the most important of which is the nature of the services to be provided. However, it is our view that subparagraph 219(2)(b)(ii) of the Act grants tax relief to those non-resident corporations who own or rent a transmission facility in Canada and whose principal business is the provision of communication or telecommunication services to the public, generally for compensation. In a situation where the provider of such services does not own or rent a transmission facility but instead purchases a block of capacity or time from other licensed transmitters and where the provider is subject to registration or licensing requirements under any of the above-noted statutes, it is our general view that the provider of such services is in the business of communications for the purpose of subparagraph 219(2)(b)(ii) of the Act.
Whether the principal business of a corporation is communications is also a question of fact that can only be determined when all the facts of a particular situation and the surrounding circumstances have been examined. The Department's view on the definition of "principal" and the determination of which of a corporation's business is its principal business for purposes of paragraph 219(2)(b) of the Act is the same as that expressed in paragraph 2 of Interpretation Bulletin IT-290, dated February 16, 1976. As long as the main or chief business of a non-resident corporation is communications, the requirement of subparagraph 219(2)(b)(ii) of the Act would be met and the corporation would be exempt from the application of subsection 219(1) of the Act.
The above comments represent our general views with respect to the subject matter of your letters. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch
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