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 a foreign affiliate doing business through the use of a non-arm's length commissionaire is conducting its business with the commissionaire or with the customers to whom its products are sold or licensed. This issue is relevant for the exclusion to the "investment business" definition in subsection 95(1).
Position:
Question of fact.
Reasons:
It would be necessary to review the agreement between the foreign affiliate and the commissionaire as well as the arrangement between the commissionaire and the customers to assess whether the commissionaire is acting as principal or merely in an agency capacity in its dealings with customers. If the commissionaire is merely an agent, the foreign affiliate would be conducting its business with the customers as opposed to the commissionaire.
972226
XXXXXXXXXX O. Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX
November 10, 1997
Dear Sirs:
Re: Foreign Affiliates - Investment Business Definition
This in response to your letter dated August 15, 1997. You request our opinion whether the use of a commissionaire arrangement by a foreign affiliate of a Canadian corporation for the purpose of licensing property to arm's length persons, may result in the activities of the foreign affiliate being regarded as an "investment business" as defined in subsection 95(1) of the Income Tax Act (the "Act"). You describe the following hypothetical situation.
1) Aco is a foreign affiliate of corporation resident in Canada. Aco is resident in country A.
2) Aco owns the rights associated with an intangible property (the "Property").
3) Aco derives its income from leasing and licensing the Property to non-resident persons with whom Aco deals at arm's length.
4) Aco is interested in marketing the Property to customers in country B. In order to do so, Aco arranges for a non-arm's length person ("Bco") to act as commissionaire for Aco in country B.
5) Under the arrangement between Aco and Bco, Bco undertakes to license the Property to arm's length customers in country B as agent for Aco. Any contract entered into by Bco with a customer will be in its own name but would be on behalf of Aco (as the undisclosed principal). Aco is bound by and bears all the risks associated with license agreements entered into by Bco on its behalf.
6) Aco pays Bco a commission for services performed by it for Aco in country B.
You request our view whether the portion of the business of Aco consisting of licensing the Property to customers in country B through Bco, would be business conducted with Bco or with the customers in country B for the purposes of determining whether the business of Aco is conducted principally with persons with whom Aco deals at arm's length for the purposes of the test (the Arm's Length Business Test) in the preamble in paragraph (a) of the definition of "investment business" in subsection 95(1) of the Act.
The question of whether the portion of the business of Aco consisting of licensing Property to customers in country B is business conducted with Bco as distributor or directly with the end users of the Property in country B, necessarily depends on the legal relationship created under the agreement(s) between Aco and Bco. Without a review of actual agreements we are unable to provide a definitive answer. However, if it is established by a taxpayer that the arrangement is such that the Property is legally licensed by Aco directly to customers in country B as opposed to having been licensed to Bco who in turn sublicenses the Property to the customers, it is our view that business of Aco consisting of such licensing would be business conducted with those customers, not Bco. Such a determination would be relevant for the purposes of the Arm's Length Business Test in paragraph (a) of the "investment definition" in subsection 95(1) of the Act.
If it is established that Bco is merely an agent negotiating license agreements for Aco as the principal, the fact that Bco performed such services in connection with the licensing of Aco Property in country B and received commissions for such service would in our view be of little relevance to the determination of whether the business of Aco is conducted principally with persons with whom Aco deals at arm's length.
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 hope the above is of assistance to you.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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