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 business of foreign affiliate was an investment business.
Position: Question of fact.
Reasons: It would be necessary to have all the facts that would be available in an actual case before the principal purpose of the business could be determined.
xxxxxxxxxx 962254
Olli Laurikainen
(613) 957-2116
Attention: xxxxxxxxxx
September 2, 1999
Dear Sirs:
Re: Investment Business Definition and Subparagraph 95(2)(a)(i)
This is in reply to your request for technical interpretation concerning the application of the above provision of the Income Tax Act (the "Act")
You provide the following hypothetical example.
1) FAl, FA2 and FA3 are foreign affiliates of Canco, a taxable Canadian corporation, that are related to Canco and in which Canco has a "qualifying interest" as defined in paragraph 95(2)(m) of the Act.
2) FA3 has 6 full time employees who provide exploration, geological and administrative services outside Canada solely to FAl and FA2 on a cost recovery basis (i.e. for compensation the value of which is not less than the cost to FA3 of those services). Neither FAl nor FA2 have any employees.
3) FAl and FA2 are in the business of exploring and exploiting foreign resource properties. FAl and FA2 each own an exploration stage which is non-income producing foreign resource property. These properties will require significant expenditures to establish the existence of an economic ore body. FAl and FA2 carry on no other business and own no assets other than their foreign resource property.
4) FA3 does not own any resource properties.
5) If an economic ore body is discovered, the resource property will either be sold or licensed to another person. Alternatively, FAl or FA2 as the case may be, will either bring a mine into production on its own or through a joint venture with another mining company.
You request our view whether under either of the alternatives set out above the "principal purpose" of the business of FAl or FA2 would be such that it would fall under the "investment business" definition in subsection 95(1) of the Act. In the event we view the business of FAl or FA2 to be an investment business, you request our view whether subparagraph 95(2)(a)(i) of the Act would apply to deem the income therefrom to be income from an active business.
In order to make a determination that a particular business is an "investment business" or that subparagraph 95(2)(a)(i) of the Act applies generally requires full knowledge of all of the facts that would be available in an actual case. However, we provide the following general comments in reference to the example set out above.
Investment Business Definition
No definitive conclusion as to whether the business of FAl or FA2 is an investment business can be reached based on the limited facts set out above. The principal purpose of a business may change over the course of time as the facts change. This would particularly be the case before economic ore bodies are discovered and while the business is incurring mounting exploration expenses but has no revenue. However, once economic ore bodies are found, the conduct of the foreign affiliate in reference to the resource property would in our view generally be considered to disclose the purpose behind the activity associated with that property (i.e. even in respect of the period before the economic ore body was discovered) and would therefore be particularly influential in determining whether the business was an investment business.
Subparagraph 95(2)(a)(i)
In the event the business of FAl or FA2 is determined to be an investment business, it would not appear that subparagraph 95(2)(a)(i) would apply to deem the income therefrom to be income from an active business. As FA3 has no resource property of its own, its business in our view would generally be characterized as a geological and administrative service business (the "Service Business"). The business of providing geological and administrative services is different from the resource exploration and exploitation business (the "Resource Business") carried on by FAl and FA2. Therefore had the Resource Business income of either FAl or FA2 been earned by FA3, such income may be viewed as having been earned by FA3 from a separate business other than the Service Business. As neither FAl nor FA2 employ more than five employees full time in the active conduct of their respective Resource Businesses, the income of FAl or FA2, if earned by FA3, would be income from an investment business to FA3 and the test in clause 95(2)(a)(i)(B) would not be met.
In addition, the facts given are insufficient to make a determination whether the test in clause 95(2)(a)(i)(A) of the Act is met. In order for the activities of FAl and FA2 to be considered "directly related" to the active business activities of FA3, it would generally be necessary to establish that FA3 employees conducted the full range of all the day-to-day activities necessary to explore the foreign resource property of FAl and FA2 and that were it not for the availability of the services of FA3, FAI and FA2 would not have acquired their respective foreign resource properties.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.
We trust this is the information you require.
Yours truly,
for Director
Reorganisations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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