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:
How must expenses for services be allocated between the investment and non-investment activities of a corporation and corporations with which it does not deal at arm's length for purposes of clause 206(1.1)(d)(iii)(C).
Position:
Expenses for services which can be traced directly to a specific non-investment activity of the corporation or non-arm's length corporation may be used to meet the $250,000 test; expenses for services which cannot be traced (e.g., relating to overhead) may all go to meet the $250,000 minimum. In essence, take all expenses for services rendered in Canada and exclude only those expenses that are shown to relate to an investment activity.
Reasons:
Services relating to investment activities are excluded. Overhead services relate generally to both investment and non-investment activities but since the test only excludes expenses relating to investment activities, inability to trace directly to investment means whole amount goes to meet the $250,000 minimum.
XXXXXXXXXX 971604
Attention: XXXXXXXXXX
July 15, 1997
Dear Sirs:
Re: Draft Clause 206(1.1)(d)(iii)(C)
Substantial Canadian Presence
This is in reply to your facsimile transmission of June 18, 1997, in which you ask for a technical interpretation concerning the above-noted proposed amendment to the Income Tax Act (the "Act") and further to several telephone conversations.
You refer to a Canadian corporation (the "Corporation") which has incurred expenses exceeding $250,000 for services of its employees and other individuals rendered in Canada in a calendar year. The Corporation carries on both "investment activities" (as defined in the draft definition to be added to subsection 206(1) of the Act) and non-investment activities. In addition, the Corporation has direct and indirect subsidiaries which carry on both investment and non-investment activities. We understand that the shareholding by the Corporation in a "subsidiary" would represent a "significant interest" (as defined in the proposed addition to subsection 206(1) of the Act) to the holder as that phrase is used in paragraph (a) of the proposed definition of "investment activity".
In order to determine if the expenses incurred on services by the Corporation relate to an investment activity or non-investment activity of the Corporation, the definition of "investment activity" must be applied to the Corporation's business or property holding (including the Corporation's shareholdings in its direct subsidiaries) to which the service relates. In addition, where such expenses are incurred by the Corporation and relate to an activity of a non-arm's length corporation, the definition of "investment activity" must be applied to the business or property holding of the corporation to or for which the service was provided.
Expenses for services rendered in Canada which are incurred by the Corporation and relate to its own or a non-arm's length corporation's non-investment activities (which includes activities relating to the holding of shares in a subsidiary whose primary activity is not investment) may be used to satisfy the $250,000 minimum.
With respect to services relating to the Corporation's overhead which cannot be specifically traced to its own or a non-arm's length corporation's identified investment activity, the expenses for these services may be included in the total used to satisfy the $250,000 minimum expenditure test. Overhead refers to costs such as legal, audit and directors' fees relating to the Corporation's general corporate activities.
We trust the foregoing comments assist.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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