30 October 1989 Income Tax Severed Letter RCT 5-8282

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.

Attention: XXX

Dear Sirs:

Re: Paragraph 81(1)(c) of the Income Tax Act (the "Act")

This is in response to your letter of June 19, 1989 in which you requested our interpretation of paragraph 81(1)(c) of the Act. We apologize for the delay in responding.

Opinions Requested

• 1. Is the effect of the amendment to paragraph 8l(l)(c) contained in S.C. 1974-75-76 c. 26 to "overturn" the decision of Furness Withy & Co. Ltd. v. The Queen [[1966] C.T.C. 482] 66 DTC 5358 (Ex. Ct.) aff'd [[1968] C.T.C. 35] 68 DTC 5033 (S.C.C.)?
• 2. A non-resident is the owner of a vessel (the "Owner") and in the course of earning business income leases it on a short-term basis complete with captain and crew to another non-resident person (the "Lessee") who provides all other services with respect to the ship such as scheduling, agency services and dealing with the loading and unloading of cargo. The vessel is to be used in international traffic, within the meaning of subsection 248(1) of the Act. Will paragraph 81(1)(c) exempt the Owner and/or the Lessee from tax under the Act with respect to income relating to the vessel?

Opinions

In the Furness, Withy case, the non-resident taxpayer provided agency, stevedoring and other related services in Canada for ships owned or chartered by it as well as ships owned by other persons. The Courts held that income from the operation of a ship did not include income attributable to the provision of such services except in the case of ships owned or chartered by the person providing such services. The predecessor to paragraph 81(1)(c) considered in the case provided that:

• 10(1) There shall not be included in computing the income of a taxpayer for a taxation year
• ... (c) the income for the year of a non-resident person earned in Canada from the operation of a ship or aircraft owned or operated by him, ...

As noted above, paragraph 81(1)(c) of the Act was amended to delete the words "owned or operated by him". In our view, the Furness, Withy case would be decided in the same manner under the current wording of paragraph 81(1)(c). The decision of the Exchequer Court in Furness Withy did not turn on the words "owned or operated by him" in paragraph 10(1)(c). Rather, the Court held that the provision of agency, stevedoring and other related services simply did not constitute the operation of a ship. The provision of the agency, stevedoring and other related services by the taxpayer for its own ships was part of the service of transporting goods provided by the taxpayer to other persons, i.e. was ancillary to the shipping of goods by the taxpayer using its ships, which clearly constituted the operation of ships. In other words, the agency, stevedoring and other services provided by the taxpayer formed part of the overall service which constituted the operation of a ship because they were ancillary thereto. Such services on their own, however, would not constitute the operation of a ship.

With respect to the second issue, we have assumed that both of the Owner and the Lessee carry on business in Canada and that the countries in which they reside grant relief to persons resident in Canada which is substantially similar to that provided by paragraph 81(1)(c) of the Act.

In the situation described above, we would generally expect that in the case of a non-bare-boat charter, the Owner and not the Lessee would be the operator of the ship. Thus income earned by the Owner from the operation of the ship would be exempt from tax under the Act by virtue of paragraph 81(1)(c). Income earned by the Lessee from the use of the ship would, however, not be eligible from the exemption from tax provided by that paragraph.

The above comments represent our opinion and are given in accordance with the practice described in paragraph 24 of Information Circular 70-6R.