4 June 1996 External T.I. 9611145 - INTERNATIONAL SHIPPING

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.

XXXXXXXXXX Tim Kuss 961114
Attention: XXXXXXXXXX

June 4, 1996

Dear Sirs:

Re: International Shipping
Request for Advance Income Tax Ruling

We are writing in reply to your letter dated February 22, 1996 requesting an advance income tax ruling regarding the application of subsection 250(6) and paragraph 81(1)(c) of the Income Tax Act (Canada) to a specific series of proposed transactions. Such a determination is primarily a question fact and in this particular case cannot be adequately addressed on a prospective basis. Consequently, as indicated in paragraph 14(j) of Information Circular 70-6R2 the Department is unable to provide a ruling with regard to this determination. Nevertheless, we are prepared to make the following comments which may or may not apply to your situation.

Our comments are general in nature. The application of these provisions to a particular case can only be made after thorough consideration of all of the relevant facts pertaining to that situation.

Operation of Ships

Key to any determination of the application of subsection 250(6) to a particular fact situation is an understanding of the term the "operation of ships" within the context of subsection 250(6). There are a number of ways to approach this issue; however, we feel it makes sense to describe situations that, in our view, clearly do and do not constitute the "operation of ships" within the meaning of subsection 250(6) and then deal with a number of situations that fall somewhere in between.

As a starting point, it is our view that a company will be considered to be engaged in the operation of a ship where: it owns, crews, and arranges passengers or cargo to transport on that ship for its own account; it charters out a ship that it owns or has chartered in, and has crewed, to another person; it charters in a ship from another person but crews it itself and arranges passengers or cargo to transport on the ship for its own account; or it charters in a ship, with crew, from another person but has, for a specified period or number of voyages, the right and responsibility to arrange passengers or cargo for its own account.

A company that owns and operates a ship can be regarded as being involved in a number of discrete activities: raising capital and debt financing; overseeing new construction, acquisitions and dispositions; crewing and catering; performing repairs and maintenance; arranging insurance; marketing; negotiating charters; arranging voyages and soliciting passengers or cargo; and stevedoring. All of these activities are appropriately characterized as constituting the operation of ships when undertaken as part of an integrated business that is carried on in the same corporation for its own account. In our view, it was not intended that any of these activities would be so viewed when undertaken separately. For example, none of a bank that lends money to acquire ships, a shipbuilder, a seamen's employment agency, a shipping insurance company, a cruise line travel agent, or a dockside cargo handling firm is intended to be treated as being in the business of operating ships.

There can, of course, be situations in which a corporation is engaged in more than one business, and it would not be surprising to find a company that, for example, operated its own line of ships while also running a cargo handling operation for other shipowners. If, in fact, that cargo handling operation had developed to a stage where it was beyond any reasonable requirements of the company's own ships, it would seem appropriate to treat it as a separate business and, in the context of the question at hand, to exclude those revenues arising in connection with cargo services provided to the other shipowners. If, however, the cargo handling facilities were established and used for the company's own ships, with its services being provided to others only on the odd occasion that the company did not require them for its own use, we would not regard the operation as a separate business and would not propose to exclude any of its revenues from the company's operation of ships.

Where assets are risked or employed in the corporation's integrated shipping business the income therefrom would generally be considered to be from the operation of ships. There may be situations where the intended use of a vessel can not be fulfilled due to economic or other events that could not be reasonably foreseen. For example, with respect to the sub-leasing of ships, where a ship is time chartered in for the purpose of being used by the lessee in its integrated shipping business, and due to subsequent events the vessel can not be so used, revenue from sub-time chartering out the vessel on a temporary basis would normally be considered to be from the operation of ships, provided that the vessel is returned to its intended use as soon as is reasonable in the circumstances. The sub-leased vessel would still be considered risked or employed in the corporation's integrated shipping business. While, in these circumstances, the sub-leasing revenue would be considered from the operation of ships, in any case where the sub-time chartering activity constitutes a separate business the revenue therefrom would not be considered to be from the operation of ships.

Where a ship is owned or bareboat chartered in by a corporation and such ship is bareboat chartered out or sub-bareboat chartered out, as the case may be, revenue therefrom will not normally be considered from the operation of ships. Where, however, the corporation's leasing activities do not constitute a separate business and the ship was originally acquired or bareboat chartered in to be used in its integrated shipping business to transport passengers or goods and, due to subsequent events, the ship can not be so used and is bareboat chartered out or sub-bareboat chartered out on a temporary basis, provided the vessel is to be returned to its intended use as soon as is reasonable in the circumstances, the revenue therefrom would be considered to be from the operation of ships. Again, the vessel would still be considered risked or employed in the corporation's integrated shipping business.

Gross revenue from other property not employed or at risk (i.e. not committed) in the corporation's integrated shipping business, for example, interest on term deposits that are not required for use in the business, will not be considered to be gross revenue from the operation of ships.

Income from shipbroking will not be considered income from the operation of ships.

While the income of a corporation may be from the operation of ships, where a corporation's integrated shipping business consists of both the operation of ships that are used primarily in transporting passengers or goods in international traffic, within the meaning of paragraph 250(6)(a), ("qualifying operations") and the operation of ships that are not so used ("non-qualifying operations"), each of the qualifying and non-qualifying operations will be considered to be a separate business. The qualifying operation must be the principal business of the corporation if the test in paragraph 250(6)(a) is to be satisfied.

Gross revenue of an integrated shipping business from bareboat chartering out or sub-time chartering out a vessel, that is included in the gross revenue from the operation of ships in accordance with the above comments, provided the vessel was acquired to be used in international traffic, will be "qualifying gross revenue" for purposes of paragraph 250(6)(b).

Any gross revenue from the operation of ships by the corporation in its own right in other than international traffic within the meaning of paragraph 250(6)(a) and rental revenue from the leasing out or sub-leasing out of ships acquired or leased in to be used primarily in the transportation of passengers and goods in other than such international traffic, will not be qualifying revenue for purposes of paragraph 250(6)(b).

We would also add that, in our view, the phrases "operation of ships" in subsection 250(6) and "operation of a ship" in paragraph 81(1)(c) have the same meaning.

Separate Business or Principal Business

Whether an activity would be considered a separate business is clearly a question of fact that can only be determined with full knowledge of all of the relevant facts. Interpretation Bulletins IT-206R and IT-433 outline some of the factors that the Department considers when making such a determination. As well, whether a corporation's "principal business" consists of the operation of ships is a question of fact. Interpretation Bulletins IT-290, IT-371 and IT-400 outline some of the criteria that should be considered when determining which of a corporation's businesses should be considered its principal business. The Department does not have any predetermined thresholds that must be met.

Used Primarily

Whether a ship is used "primarily" in international traffic is, again, a question of fact. The Department is not prepared to set arbitrary guidelines and, in a particular fact pattern, some measures will be more appropriate than others.

All or Substantially All

Where 90% or more of a corporation's gross revenue is from the operation of ships in international traffic the "all or substantially all" test will normally be considered to have been met.

It is conceivable that, in respect of a corporation that has met the test in paragraph 250(6)(a), part of its business activities relate to the operation of ships in international traffic and part of its activities relate to the operation of ships "in Canada". We emphasize that any gross revenue from a corporation's domestic shipping operation will not be qualifying gross revenue for the purposes of paragraph 250(6)(b).

Dividends received from a corporation (including a wholly-owned subsidiary) will be included in the recipient's gross revenue for the year for purposes of paragraph 250(6)(b); however, such amounts would not be considered to be from the operation of ships notwithstanding that the income of the corporation paying such dividends may be derived solely from the operation of ships in international traffic.

Provided that the proposed amendment to paragraph 250(6)(b) is enacted in substantially the same form as proposed in Amendments to the Income Tax Act and Related Statutes which was issued by the Minister of Finance on April 26, 1995 (the "Proposed Amendments"), dividends from certain subsidiary wholly-owned corporations (as defined in subsection 87(1.4)) that meet the other requirements of the proposed paragraph will be considered "qualifying revenue" for purposes of the "all or substantially all" test. However it should be noted that the "principal business test" in paragraph 250(6)(a) would still need to be satisfied for subsection 250(6) to apply. Consequently, under the Proposed Amendments, a holding company which receives dividends from a subsidiary which operates an international shipping business will not qualify for subsection 250(6) treatment.

Paragraph 81(1)(c)

It is the Department's position that the condition in paragraph 81(1)(c) that "the country where that person resided grants substantially similar relief for the year to a person resident in Canada" will be satisfied if such foreign country simply does not impose an income tax, or the income of persons resident in Canada from the operation of a ship or aircraft in international traffic is exempt from tax in such foreign country by virtue of domestic legislation of such country or by tax treaty between such foreign country and Canada.

Subsection 250(6) is intended merely to clarify the residency of corporations engaged in international shipping. It does not amend the substantive law concerning the taxation of non-residents. In our opinion paragraph 81(1)(c) does not apply to capital gains. However, the capital gain in respect of the disposition of a ship by a non-resident would not be subject to tax in Canada unless it was "taxable Canadian property". Whether a particular asset is capital property used by a non-resident person in carrying on a business (other than an insurance business) in Canada such that the asset is taxable Canadian property by virtue of subparagraph 115(1)(b)(ii) is essentially a question of fact that can only be answered after determination of all relevant facts pertaining to the particular case under consideration. The Department does not have any administrative position in this regard.

Provided the proposed amendment to subparagraph 115(1)(b)(ii) is enacted in substantially the same form as proposed in the Proposed Amendments, ships and aircraft used principally in international traffic and personal property pertaining to the operation of such ships or aircraft will be not be taxable Canadian property if the country in which the non-resident person is resident grants substantially similar relief for the year to a person resident in Canada.

Resident in More Than One Country

A corporation to which subsection 250(6) applies may be considered for purposes of the Act to be resident contemporaneously in the country in which it is incorporated and another country. Subsection 250(6) deems a corporation that is subject thereto to be resident in the country in which it is incorporated and not to be resident in Canada. It does not, however, deem such corporation to be resident only in the country in which it is incorporated. A corporation may be resident in more than one jurisdiction at the same time. Accordingly, we will interpret subsection 250(6) as not precluding a corporation from also being considered resident in a foreign country other than that in which it is incorporated. We observe that Regulation 5907(1)(a), for example, contemplates that a non-resident corporation may be resident in more than one foreign country at any particular time. Whether a non-resident corporation will be considered resident in more than one foreign country will be, again, a question of fact.

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch