24 April 1998 Internal T.I. 9801607 - FILING - NON-RESIDENT CORPORATION

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 corporation incorporated and operating in the U.S. but with central Mgt and Control in Canada must file a tax return.

Position:

Yes

Reasons:

Central management activities constitute carrying on business activities

Revenue Canada Revenu Canada T2001
MEMORANDUM NOTE DE SERVICE Rev.94
DATE
April 24, 1998
?TO ? FROM
A DE David R. Senécal
A. Weir International Section
Non-Filer Program Tel: (613) 957-9796
International Tax Services Office
? ?
FILE
DOSSIER 980160

SUBJECT:
OBJET: Filing Requirements - XXXXXXXXXX

This is in reply to your memorandum dated January 15, 1998, where you request our comments with regard to the above-mentioned corporation’s obligation to file T2 corporate tax returns in the following circumstances:

Facts

• XXXXXXXXXX

According to the taxpayer, the corporation has no permanent establishment in Canada and its only link with Canada is a U.S. funds bank account situated in XXXXXXXXXX which is used to clear its surplus funds to its controlling parent XXXXXXXXXX or other affiliated corporations. The corporation was officially released from the obligation to file XXXXXXXXXX provincial tax returns on XXXXXXXXXX.

• XXXXXXXXXX TSO has taken the position that XXXXXXXXXX is required to file returns in Canada on the basis that the corporation is resident in Canada for the purposes of the Income Tax Act (the “Act”). In the view of the TSO, the corporation is managed and/or controlled by XXXXXXXXXX, a resident of Canada, from the premises of XXXXXXXXXX.

Comments

In our view, by virtue of XXXXXXXXXX incorporation in the United States, paragraph 3 of Article IV of the Canada-U.S. Income Tax Convention (the “Convention”) would deem the corporation to be a resident of the United States for purposes of the Convention. As the Convention would then generally deny Canada the right to tax non-Canadian source income earned by XXXXXXXXXX subsection 250(5) of the Act would apply and deem the corporation not to be resident in Canada for purposes of the Act.

The fact that XXXXXXXXXX is not a resident of Canada does not, however, necessarily mean that the corporation is not required to file a tax return pursuant to subsection 150(1) of the Act. While a non-resident corporation that does not have and has never had any connection with Canada may not be subject to the requirement under subsection 150(1) to file a return, all non-resident corporations that carried on business in Canada, disposed of taxable Canadian property or had other income of the kind referred to in section 115 of the Act, must comply with subsection 150(1).

Whether or not a non-resident is carrying on business in Canada or has a permament establishment in Canada and profits attributable thereto are questions of fact that can only be determined by the TSO based on a full understanding of all of the relevant circumstances. Having said this, we are inclined to the view that XXXXXXXXXX carries on business in Canada by virtue of the executive and management functions (i.e., central management and control) being exercised in Canada by XXXXXXXXXX, a Canadian resident individual, in his capacity as President of the corporation and, consequently, we are of the view that the corporation is required to file an income tax return pursuant to subsection 150(1) of the Act.

It is clear from the definition of “business” in subsection 248(1) of the Act and the extended meaning of carrying on business in Canada in section 253 as well as from Canadian jurisprudence that the threshold for considering that a non-resident is carrying on business in Canada for the purposes of the Act is very low. In considering what activities would breach this threshold, we are of the view that most management activities involving planning and policy making, starting with central management where the strategic decisions of the corporation are made, are “core” rather than “auxiliary” business activities. This is because the value of any enterprise is highly influenced by managerial activities of this nature.

We believe that support for the argument that management activities are considered to constitute the carrying on of business can also be found in the structure and wording of OECD-based income tax treaties such as those entered into by Canada including the Canada-U.S. Income Tax Convention (the “Convention”) which is referred to by the taxpayer’s representative, XXXXXXXXXX. For one thing, these treaties characterize a fixed place of business as a permament establishment (“PE”) only if the enterprise undertakes a “business” activity through the place of business. In other words, there is a requirement that the activity performed through the place of business be the “business” of the enterprise. Consequently, we believe that the definition of a PE in tax treaties presupposes the performance of a business activity. This being the case, the fact that a “place of management” is specifically mentioned in Article 5 of OECD-based treaties as being an example which can be regarded prima facie as constituting a PE. is, in our view, a clear indication that the activities performed in the enterprise’s “place of management” must be “business” activities.

While we are of the view that XXXXXXXXXX is required to file a corporate income tax return, we are not in a position to make any definitive comments on whether or to what extent the corporation’s income and expenses are reasonably attributable to its business carried on in Canada. You may therefore wish to discuss this issue with the Transfer Pricing & Competent Authority Division of the International Tax Directorate.

We trust that our comments will be of assistance to you.

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