30 November 1995 External T.I. 9520645 - CORPORATE EMIGRATION AND SECTION 219

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:

1. definition of Communication and Principal Business
2. When is property not considered incidental to the business
3. Does the treaty exempt the exit tax under 219.1
4. Does change in residence constitute emigration

Position:

1. "Communication" per 219(2)(b) refer to CRTC
2. Incidental property - risked in the business
3. No
4. Corp is resident where mind, management and control

Reasons:

1. Not enough facts to determine Principal business expressed in IT 371 and 290
2.McCutheon Farms Ltd 91DTC 5407

3. 128 deems a year end and 219.1 only applies to Cdn resident.

4. Subsection 250(5.1)

							952064
XXXXXXXXXX							C.Tremblay

Attention: XXXXXXXXXX
October 30, 1995

Dear Sirs:

Re: Corporate Emigration and Section 219

This is in reply to your letter of July 26, 1995, concerning a situation where Company X and Company Y wish to emigrate to Barbados because their majority shareholder has taken residence there.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. If, however, your request describes completed transactions involving a specific taxpayer, your questions should be directed to your District Services Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Our Comments:

1)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.

Further, when determining whether a business is "communications" for purposes of subparagraph 219(2)(b)(ii) of the Act, references should 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 the principal business of a corporation is communications is 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 businesses is its principal business for purposes of paragraph 219(2)(b) of the Act is the same as that expressed in Interpretation Bulletin IT-371 and paragraph 2 of IT-290. 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.

Although the conclusion is heavily dependent on the facts of the matter which have not been adequately established, in our view, a corporation that provides stories to newspapers or operates a news service, preparing news and information using the mail or telephone wires to deliver its product or service would not meet the exemption requirement of subsection 219(2) of the Act.

2)Whether property is considered incidental to the principal business of communication requires a test that emphasises that the holding or using of property must be linked to some definite obligation or liability of the business. In this context "risked" means more than a remote risk. In our view, the comments in McCutheon Farms Ltd 91 DTC 5047, Majestic Tool & Mold Limited v The Queen 94 DTC 1220, Ensite Limited v The Queen 86 DTC 6521 are relevant.

A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would have a decidedly destabilizing effect on the corporate operations. For example, assets not used in the business - those not used to fulfil a requirement which had to be made in order to do business are not employed and risked in the business.

3)The provisions of section 219.1 of the Act apply to a taxation year which, by virtue of paragraph 128.1(4)(a) of the Act, is deemed to end immediately before the corporation becomes resident of a jurisdiction outside Canada.

Since section 219.1 of the Act only applies to the corporation's taxation year end which ended immediately before emigrating in such taxation year an agreement or convention will not apply because the corporation is only resident in Canada. Accordingly, the corporation will be required to pay part XIV tax at a rate of 25% as calculated under the provisions of section 219.1 of the Act.

4)It is a question of fact whether or not a corporation has emigrated. Such a change of residential status will occur if mind, management and control of the corporation are outside Canada and subsection 250(5.1) of the Act applies as a result of the corporation being continued outside Canada. A change in residential status will also occur if the corporation is deemed to be a non-resident of Canada by virtue of subsection 250(5) of the Act as a result of the corporation becoming resident in a country with which Canada has a tax treaty in force and it is established that the corporation will be treated as a resident of that country for the purposes of the tax treaty.

The Branch tax as it would apply to the non-resident imposes a standard rate of tax pursuant to section 219 of the Act at 25% and the non-resident is subject to any overriding provision in a bilateral income tax treaty that may exempt or partly exempt a corporation from, or limit the rate of tax.

Whether or not a residence in a foreign country by the major shareholder is an acceptable reason for a corporation to emigrate can only be determined when all the facts of a particular situation and the surrounding circumstances have been examined.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
- 4 -

.../cont'd