2011 Ruling 2011-0426551R3 - 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.

Principal Issues: Whether the provision of certain services by a Canadian corporation to a non-resident corporation will result in the non-resident corporation carrying on business in Canada

Position: No.

Reasons: Factual and legal determination --- see paragraphs 3 and 4

XXXXXXXXXX  

 					2011-042655

 					XXXXXXXXXX 

XXXXXXXXXX , 2011

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above.

The ruling given herein is based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your advance income tax ruling request do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter, the following terms have the meaning specified.

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) as amended to the date of this advance income tax ruling;

(b) "Additional Services" means the internal audit services described in paragraph 12 below;

(c) "Canco" means XXXXXXXXXX ;

(d) "Computer Services" means XXXXXXXXXX ;

(e) "CRA" means the Canada Revenue Agency;

(f) "Foreignco" means XXXXXXXXXX ;

(g) "Foreign Countries" means XXXXXXXXXX ;

(h) "Foreign Country 1" means XXXXXXXXXX ;

(i) "Foreign Country 2" means XXXXXXXXXX ;

(j) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(k) "Non-Resident Group" means the direct and indirect affiliates of Parent that are non-residents of Canada;

(l) "Other Support Services" means XXXXXXXXXX ;

(m) "Parent" means XXXXXXXXXX ;

(n) "Partnership" means XXXXXXXXXX , a partnership that was formed under the laws of Foreign Country 1;

(o) "Province" means XXXXXXXXXX ;

(p) "related persons" has the meaning assigned by subsection 251(2) of the Act;

(q) "Services Agreement" means the services agreement entered into by Parent and Canco on XXXXXXXXXX which provides that Canco will provide the Other Support Services to Parent and the Non-Resident Group;

(r) "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act; and

(s) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.

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

Facts

1. Parent is a company formed in Foreign Country 1. Parent carries on the XXXXXXXXXX previously carried on by the Partnership. Parent provides XXXXXXXXXX .

2. Canco is a taxable Canadian corporation incorporated under the laws of the Province and is a subsidiary wholly-owned corporation of Foreignco. Canco carries on business in Canada and uses its own employees to provide the Computer Services and the Other Support Services to Parent and the Non-Resident Group. Canco's business number is XXXXXXXXXX . Canco files its tax returns with the XXXXXXXXXX Taxation Centre and its tax affairs are administered by the XXXXXXXXXX Tax Services Office.

3. Canco does not offer anything of Parent's for sale in Canada, does not undertake any marketing activities directly to the Canadian market on behalf of Parent and, other than for the receipt and payment of funds, is not an agent of Parent.

4. Parent does not use the offices of Canco to conduct any business in Canada, does not have any employees in Canada, does not sign or negotiate any contracts in Canada, does not solicit or offer anything for sale in Canada, does not engage in any other profit-producing activity in Canada and does not have an agent who has the authority to conclude contracts on its behalf present in Canada.

5. Foreignco is a holding company incorporated under the laws of Foreign Country 2. All of the issued and outstanding shares of Foreignco are owned directly or indirectly by shareholders/members of Parent and the Non-Resident Group. Foreignco does not carry on business in Canada.

6. To the best of your knowledge and that of Parent, none of the proposed transactions involved in this ruling letter:

(i) is in an earlier return of Parent or any persons related to Parent,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of Parent or any persons related to Parent,

(iii) is under objection by Parent or any persons related to Parent,
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(v) is the subject of any advance income tax rulings previously issued to Parent, Canco or any persons related to Parent or Canco.

Proposed Transactions

7. Parent and Canco will amend the Services Agreement to include Canco's provision of the Additional Services to Parent and the Non-Resident Group.

8. The amended Services Agreement (hereinafter referred to as the "Amended Services Agreement") will continue to specify that Canco does not have the authority to execute or deliver any contract, agreement or instrument in the name of, or on behalf of, Parent or any member of the Non-Resident Group and, other than for the receipt and payment of funds, cannot act as an agent of Parent or any other member of the Non-Resident Group. Furthermore, the Amended Services Agreement will continue to provide that Canco cannot assume or create any obligation, liability or responsibility whatsoever, express or implied, on behalf of or in the name of Parent or any member of the Non-Resident Group. The authority of Canco to act for Parent and/or any member of the Non-Resident Group will continue to be limited solely to the matters specifically set forth in the Amended Services Agreement. The Amended Services Agreement will continue to provide that Canco will receive a commercially reasonable fee for the provision of its services to Parent and/or any member of the Non-Resident Group.

9. At no time before or after the ratification of the amendment to the Services Agreement will Parent sign or negotiate any contracts in Canada, engage in any profit-producing activity in Canada, solicit or offer anything for sale in Canada, have an agent who has the authority to conclude contracts on its behalf present in Canada or use the offices of Canco to conduct any business in Canada.

10. Canco will continue to earn its own profits, will not offer anything of Parent's for sale in Canada and, other than for the receipt and payment of funds, will not act as an agent of Parent.

11. All of the directors of Parent are non-residents and all of the directors' meetings will continue to be held outside of Canada. The business decisions of Parent will continue to be made outside of Canada and no employee of Canco will be involved in making such business decisions.

Additional Information

12. The Additional Services will consist of:

(a) identification and risk assessment of Parent's and the Non-Resident Group's global structure, activities and processes;

(b) development and implementation of an approved annual audit plan, including any special tasks or projects;

(c) maintenance of a professional audit function with sufficient knowledge, skills, experience and professional certifications to meet the standards required by the international professional association Institute of Internal Auditors;

(d) evaluation and assessment of significant merging/consolidating functions and new or changing services, processes, operations and control processes coincident with their development, implementation and/or expansion across all jurisdictions;

(e) issuance of quarterly reports that summarize the results of audit activities;

(f) informing Parent and the Non-Resident Group of emerging trends and successful practices in internal auditing;

(g) assisting in the investigation of significant suspected fraudulent activities and notify Parent and/or the Non-Resident Group of the results;

(h) consideration of the scope of work of the external auditors and regulators, as appropriate, for the purpose of providing optimal internal audit coverage at a reasonable cost; and

(i) provision of an internal auditor that is an employee of Canco.

13. In advance income tax rulings 2009-030700, dated XXXXXXXXXX , and 2010-038366, dated XXXXXXXXXX , as amended by 2011-039226 dated XXXXXXXXXX , the CRA provided Parent with rulings that Canco's provision of the Computer Services and the Other Support Services in accordance with the terms and conditions of the relevant agreements, in and by themselves, would not cause Parent to be carrying on business in Canada for the purposes of paragraph 2(3)(b) or subsection 115(1) of the Act.

Purpose of the Proposed Transactions

14. Canco has access to a well-educated, knowledgeable and experienced labour force. Parent wishes to amend the Services Agreement with Canco to add the provision of the Additional Services to gain access to this labour force. The amendment to the Services Agreement will enable Canco to expand its business operations in Canada.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. The amendment to the Services Agreement, whereby Canco will provide the Additional Services described in paragraph 12 above, in and by itself, will not cause Parent to be carrying on business in Canada for the purposes of paragraph 2(3)(b) or subsection 115(1) of the Act.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and is binding on the CRA provided that Parent and Canco have amended the Services Agreement to provide for the Additional Services before XXXXXXXXXX .

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, nothing in this ruling should be construed as implying that the CRA:

(a) has reviewed, or agreed to, the reasonableness of any fees, as described in paragraph 8 above, that will be paid by Parent to Canco pursuant to the Amended Services Agreement;

(b) has reviewed, or agreed to, the application of section 247 of the Act to the fees, as described in paragraph 8 above, that will be paid by Parent to Canco pursuant to the Amended Services Agreement; or

(c) has, except for the determination that Canco's provision of the Computer Services, the Other Support Services and the Additional Services have not, in and by themselves, caused Parent to be carrying on business in Canada, determined whether Parent is carrying on business in Canada.

The above-noted 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.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch