30 November 1996 Ruling 9720713 - CARRYING ON BUSINESS IN CANADA

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 the fact that a non-resident corporation has a non-related Canadian company perform certain accounting and clerical services for it under a sub-contract would, in and of itself, cause the non-resident company or its non-resident clients with which it has an administrative services contract to be carrying on business in Canada.

Position:

Non-resident corporations concerned do not carry on business in Canada solely by virtue of the fact that an arm's length Canadian corporation provides non-core services under sub-contract to one of the non-residents who has contracted to perform certain administrative duties for the other non-resident corporations.

Reasons:

Based on the specific facts and proposed transactions Canco is not acting in a capacity of agent for the non-residents and is not simply an extension of the non-resident.

XXXXXXXXXX							972071
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1997

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In your further letters of XXXXXXXXXX, you provided additional information with respect to the facts and proposed transactions described in your original letter.

To the best of your knowledge and that of the taxpayers involved, none of the issues contained herein is:

(i) involved in an earlier return of the taxpayers or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a return already filed by the taxpayers or a related person,

(iii)under objection by the taxpayers or a related person,

(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by this Directorate.

Definitions

In this letter, the following terms have the meanings specified:

(a) Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated;

(b) "Foreignco" means XXXXXXXXXX and is more fully described in paragraph 1 below;

(c) "Investment Manager" means XXXXXXXXXX and is more fully described in paragraph 10 below;

(d) "Managementco" means XXXXXXXXXX and is more fully described in paragraph 7 below;

(e) "LLC" means XXXXXXXXXX and is more fully described in paragraph 11 below;

(f) "Canco" means XXXXXXXXXX and is more fully described in paragraph 12 below;

(g) "Individual #1" means XXXXXXXXXX, a non-resident of Canada;

(h) "Individual #2" means XXXXXXXXXX, a non-resident of Canada;

(i) "Individual #3" means XXXXXXXXXX, a non-resident of Canada;

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

Foreignco

1.Foreignco is an open-end investment fund.

XXXXXXXXXX

It has not been continued under the laws of Canada. The principal office of Foreignco is located in XXXXXXXXXX.

2.The primary objective of Foreignco is to

XXXXXXXXXX

Foreignco does not have any investments in Canada.

3.Foreignco's affairs are managed under the supervision of its Board of Directors, which is currently comprised of Individual #1, Individual #2 and Individual #3. None of the directors is, or will be, resident in Canada. No meetings of the Board of Directors are or will be held in Canada. Foreignco has no office or physical presence in Canada.

4.Common shares of Foreignco are offered for sale at a purchase price equal to their net asset value and are widely distributed. Currently, no holders of the common shares of Foreignco are resident in Canada. Furthermore, the common shares of Foreignco will not be marketed for sale in Canada, although sophisticated Canadian investors may purchase the common shares directly from transfer agents located outside of Canada. The common shares are generally redeemable at the option of the holder at the end of each quarter at the net asset value of the shares.

5.Foreignco's trading and investments will be managed on a fully discretionary basis by the Investment Manager of which Individual #1 is President and sole director. LLC assists the Investment Manager with its duties as the investment manager of Foreignco. The Investment Manager will manage the assets of Foreignco pursuant to an investment management agreement between the Investment Manager, LLC and Foreignco. Other investment managers may be selected by the Investment Manager at its discretion. The Investment Manager will not select an investment manager resident in Canada.

6.Managementco provides management and administrative services to Foreignco.

Managementco

7.Managementco is a corporation incorporated under the laws of XXXXXXXXXX and has not been continued under the laws of Canada. None of the directors of Managementco are resident in Canada and no meetings of the board of directors of Managementco are held in Canada. Managementco has no office or physical presence in Canada.

8.As noted above, Managementco has entered into a management and administrative services agreement with Foreignco (the "Management Agreement") pursuant to which Managementco will render accounting, administrative and clerical services. Managementco also renders these services to many other investment funds resident in XXXXXXXXXX.

9.Managementco has approximately XXXXXXXXXX employees, all located in XXXXXXXXXX.

Investment Manager

10.Investment Manager, the investment manager to Foreignco, is a corporation formed under the laws of XXXXXXXXXX, of which Individual #1 is the President and sole director. Investment Manager has no offices or fixed place of business in Canada.

LLC

11.LLC assists Investment Manager with its duties as investment manager of Foreignco, although Investment Manager is responsible for the investment of Foreignco's assets. LLC is a limited liability company formed under the laws of XXXXXXXXXX and is affiliated with Investment Manager. Principals of Investment Manager, including Individual #1, have membership interests in LLC. LLC has no offices or fixed place of business in Canada.

Canco

12.Canco is a corporation incorporated under the Business Corporations Act (XXXXXXXXXX). Canco has an office in XXXXXXXXXX and currently employs XXXXXXXXXX people. No employees of Foreignco, Managementco, Investment Manager or LLC will be involved in the day-to-day activities of Canco.

Other Information

13.Managementco deals at arm's length with the shareholders of Foreignco.

PROPOSED TRANSACTIONS

1.Managementco will enter into an administration services agreement (the "Agreement") with Canco pursuant to which, in consideration of certain fees, Canco, as an independent contractor, will provide the following, and only the following services:

(a) preparing and maintaining all customary financial and accounting books in appropriate form and in sufficient detail to support an annual independent audit of the financial condition of Foreignco in accordance with instructions provided by Managementco;

(b) making books and records available to audit and answering questions with respect to same;

(c) based on accounting records, calculating the fees and expenses of the supervisory directors in connection with attending meetings, non-Canadian taxes, non-Canadian filing fees and other costs and expenses incurred for the account of Foreignco (other than transaction costs and related expenses relating to the investment program);

(d) preparing quarterly and annual financial statements for Foreignco;

(e)computing the market value and net asset value of the assets held by Foreignco each month;

(f)calculating proceeds for the redemption of shares of Foreignco;

(g)calculating the amount of dividends that may be paid by Foreignco in accordance with guidelines provided by Managementco;

(h)calculating the fees payable to the Investment Manager in accordance with relevant formulae;

(i) preparing monthly reports containing statements of net assets and liabilities, operations, changes in net assets and subsidiary or detailed reports, as may be requested by Managementco;

(j)placing on ledgers any capital information (i.e. share subscription and redemptions) based on information received from Managementco; and

(k)any other accounting and accounting related functions incidental to the foregoing.

2.Managementco will itself continue to provide all other administrative and clerical services currently provided to Foreignco.

3.Pursuant to the Agreement, Canco will have no right to directly affect the legal relations of Managementco as regards to other persons. Specifically, it will have no authority to make contracts on behalf of Managementco. Furthermore, the Agreement will specifically provide that there will be no agency relationship between Managementco and Canco.

4.No resolution will be passed by Managementco appointing Canco as its agent nor will a resolution be passed by Canco accepting an appointment of agency of Managementco.

5.The accounts of Canco will show its profits as its own, with no liability to account therefore to Managementco.

6.Canco will employ the persons who will perform the services described in the Agreement. The various contracts entered into by Canco in the course of carrying on its business in Canada will create rights and obligations that are personal to Canco vis-à-vis the third parties.

PURPOSE OF PROPOSED TRANSACTIONS

The reason for Canco and Managementco entering into the Agreement is that additional resources are required to perform certain of the accounting, administrative and clerical services provided to Foreignco. The Agreement, as described herein, provides an excellent opportunity for Canco to grow and employ additional residents of Canada.

RULING GIVEN

Provided that the above statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and that the proposed transactions are carried out as set forth herein, the following ruling is given:

Foreignco and Managementco will not, as a result of the provision of services by Canco pursuant to the Agreement, in and by itself, be carrying on business in Canada for the purpose of paragraph 2(3)(b) of the Act.

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada, Customs, Excise and Taxation on December 30, 1996 and is binding provided that the Agreement described in paragraph 1 of the Proposed Transactions is signed by XXXXXXXXXX.

The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.

Comment

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

Yours truly,

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