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.
Principal Issues:
Whether funds representing interest earned on bank deposits are considered allowable liquid assets referred to in subsection 808(3) of the Income Tax Regulations
Position TAKEN:
Yes if the bank deposits that generated the interest are attributable to profits from carrying on a business or were used or held in the course of carrying on a business in Canada
Reasons FOR POSITION TAKEN:
In accordance with the clear wording of subsection 808(3) of the ITR.
September 7, 1995
K. Falkenberg, Team Coordinator Foreign Section
International Tax Audit S. Leung
Calgary Tax Services Office 957-2115
Attention: Ken Stensrud
951919
Allowable Liquid Assets for Branch Tax Purposes
XXXXXXXXXX
We are writing in reply to your memorandum which we received on July 21, 1995 and in which you requested our comments on the above-noted issue described in your memorandum and the letter of June 6, 1995 from XXXXXXXXXX.
Our understanding of the facts of the situation is as follows:
XXXXXXXXXX
You requested our view as to whether the funds deposited with the XXXXXXXXXX by the Branch which were not used or held in the course of the business of XXXXXXXXXX should be included in computing the amount of the allowable liquid assets referred to in subsection 808(3) of the Income Tax Regulations (the "ITR").
It is a question of fact whether the interest generated from XXXXXXXXXX bank deposits was business income or income from property. It may be argued that such interest is incidental or pertaining to the business carried on by XXXXXXXXXX through the Branch and, therefore, would be considered business income. As we do not have all the facts of the situation we refrain from offering any comments in this regard. In the following comments we assume that such interest was not business income. If it was, our comments may be different.
Before we comment on the issue, we would like to point out that the following phrases are quite different as to their meanings:
"attributed to the business carried on by him through a permanent establishment" as used in subsection 805(1) of the ITR; and
"attributable to the profits of the corporation from carrying on a business" as used in subsection 808(3) of the ITR.
Paragraph 805(1)(a) of the ITR states that every non-resident person who carries on business in Canada shall be taxable under Part XIII of the Act on all amounts otherwise taxable under that Part except those amounts that may reasonably be attributed to the business carried on by him through a permanent establishment in Canada. Therefore, interest income that is not attributable to the business carried on by a non-resident through a permanent establishment in Canada will be subject to tax under Part XIII of the Act. Consequently, if the interest income earned by XXXXXXXXXX from its bank deposits is not considered attributable to a business carried on by XXXXXXXXXX through the Branch,1 such interest would be subject to tax under Part XIII, not Part I, of the Act.
However, the bank deposits that generated such interest income may still be considered allowable liquid assets for purposes of computing branch tax under section 219 of the Act if these funds are attributable to the profits (whether past or present) of XXXXXXXXXX from carrying on a business in Canada. This is the case regardless of whether the interest generated by such funds is subject to Part XIII tax or not. The above interpretation is supported by the Department of Finance which stated in the Technical Notes of July 21, 1993 that the allowable liquid assets of a corporation do not include amounts that were not either generated by the Canadian branch (business) operation or intended for the use of the Canadian branch (in its business operation). Paragraph 16 of IT-137R3 also states that the specified liquid assets that qualify (as the allowable liquid assets) need not be identified with the business carried on in Canada. As a result, if the bank deposits that generated the interest income were attributable to the business profits in Canada, it is our view that such funds on deposit could be considered allowable liquid assets for purposes of paragraph 808(2)(i) of the ITR.
Nevertheless, funds representing interest earned where the interest is not considered to be business income would not be considered to be allowable liquid assets because those funds are not attributable to the business profits of XXXXXXXXXX earned in Canada. Therefore, you may need to ascertain what portion of the bank deposits represents interest earned or something else which is not business profit and exclude that portion from the computation of the amount of the allowable liquid assets.
Summary
It is our view that while interest earned by the Branch may be subject to tax under Part XIII of the Act because it may not reasonably be attributed to the business carried on by XXXXXXXXXX through the Branch, the bank deposits that generated the interest could be included as part of the allowable liquid assets for purposes of paragraph 808(2)(i) of the ITR if the bank deposits were attributable to the profits of XXXXXXXXXX from carrying on a business in Canada or were used or held by XXXXXXXXXX in the year in question in the course of carrying on a business in Canada. Nevertheless, the funds representing non-business interest income of current or previous years would not qualify as allowable liquid assets referred to in subsection 808(3) of the ITR.
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
ENDNOTES
1 See The Queen v. The Canada Southern Railway Company (1986) 1 C.T.C. 284 (FCA) at page 293 for the judge's conclusion that for the purposes of Regulations 805(1) the only amounts that can be said to be reasonably attributable to the business carried on in Canada by a non-resident person are amounts which can properly be classified as income from that business.
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