21 January 1999 External T.I. 9831795 - CARRYING ON BUSINESS

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 services performed in U.S. by employee of resident company constitute carrying on business in Canada for purpose of s. 125.

Position:

No.

Reasons:

Business carried on at place where services rendered.

XXXXXXXXXX 983179
B. Bloom
Attention: XXXXXXXXXX

January 21, 1999

Dear Sir:

Re: Business Carried On In Canada

We are writing in response to your letter of December 2, 1998, wherein you request an opinion as to whether the income of a corporation (“Opco”) from certain activities described below qualifies as income from a business carried on in Canada for the purpose of section 125 of the Income Tax Act (the “Act”).

You state that, throughout the relevant period, Opco is a Canadian-controlled private corporation wholly-owned by two Canadian residents who are spouses (“Spouse A” and “Spouse B”). Spouse A owns 90% of the shares of Opco and is Opco’s sole employee. Spouse B owns the remaining 10% of Opco’s shares and is Opco’s sole director. Opco’s head office is located in Canada. Opco provides services through Spouse A to a U.S. entity on a temporary basis. The services are performed solely in the U.S.. Some administrative functions relating to the provision of such services by Spouse A are carried out in Canada. For example, Spouse B invoices the U.S. entity from Canada for the services performed in the U.S. by Spouse A.

You ask our opinion as to whether the income derived from the provision of services by Spouse B in the U.S. for the U.S. entity as described above constitutes income from a business carried on in Canada for the purpose of section 125 of the Act.

Whether a business is carried on in Canada is a question of fact that can only be determined based upon a full understanding of all the relevant circumstances and generally only retrospectively after all such circumstances have been established. We are thus unable to express a definitive opinion in response to your question. However, we can make the following general observations, which, we hope, will be of assistance to you.

Paragraph 26 of Interpretation Bulletin IT-270R2 provides that the place where a business is carried on is, in general terms, the place where the operations in substance take place. In the case of a services business, this is where the services are performed. Paragraph 10 of Interpretation Bulletin IT-73R5 concerning the small business deduction is to the same effect : “When a corporation’s business involves the rendering of services, that business is carried on in Canada only to the extent that the services are rendered in Canada....”

Based on the limited information provided in your letter, Opco is engaged in the business of providing services (assuming that Opco carries on a business) and the services in question are rendered solely outside of Canada. Accordingly, the income derived from such services is not income from a business carried on in Canada. It is also worth noting that, based on the limited information you have provided us, it may be that Opco is engaged in a “personal services business” as defined by subsection 125(7) of the Act. If that is the case, then any income attributable to such business would not be eligible for the small business deduction.

The above comments represent our general views with respect to the subject matter of your letter and are made in accordance with the practice described in paragraph 22 of Information Circular 70-6R3.

Yours truly,

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