15 June 2006 External T.I. 2006-0183921E5 - Definition of Canada & Reg.105

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: (1) Whether the work done by NRco could be considered to be "in connection with the exploration for or exploitation of the minerals..." for the purposes of 255(b) of the Act simply because the main purpose of the work done is to determine whether Canada has the right to the resources under UNCLOS ? (2) If the answer to question 1 is negative, will the provisions of the Interpretation Act and of the Oceans Act apply to deem the activities described above to be in Canada?

Position: (1) No (2) No

Reasons: (1) The activities carried on under the Program are not "in connection with the exploration for or exploitation of the minerals..." for the purposes of 255(b) of the Act; (2) The Interpretation Act provides that Canada only includes the internal waters and territorial sea of Canada.

XXXXXXXXXX 							2006-018392

June 15, 2006

Dear XXXXXXXXXX:

Subject: Definition of "Canada" & Section 105 of the Income Tax Regulations

This is in response to your request for our view on whether the extended definition of Canada in section 255 of the Income Tax Act (the "Act") applies in the circumstances set out below.

Facts

XXXXXXXXXX.

Issues

1. Whether the work done by NRco could be considered to be "in connection with the exploration for or exploitation of the minerals..." for the purposes of 255(b) of the Act and therefore be deemed to be done in Canada simply because the main purpose of the work is to determine whether Canada has the right to the resources under the UN agreement?

2. If the answer to question 1 is negative, will the provisions of the Interpretation Act and of the Oceans Act apply to deem the activities describes above to be in Canada?

The particular situation outlined in your letter is factual and relates to the activities of a particular taxpayer. As explained in Information Circular 70-6R5 it is not this Directorate's practice to comment on transactions involving specific taxpayers except in the form of an advance income tax ruling. However, we are prepared to offer the following non-binding opinion.

Question 1

1-) Section 255 of the Act & Section 105 of the Regulations

The term " Canada" is not defined in the Income Tax Act. Paragraph 255(a) merely states that, for income tax purposes, Canada includes the sea bed and subsoil of the submarine areas adjacent to the coasts of Canada in respect of which the Government of Canada or of a province, grants a right, license or privilege to explore for, drill for or take any minerals, petroleum, natural gas or related hydrocarbons. Paragraph 255(b) further provides that Canada includes the seas and airspace above those submarine areas in respect of any activities carried on in connection with the exploration for or exploitation of the said minerals, petroleum, natural gas or hydrocarbons.

As can be seen from the above definitions of Canada, Canada is not limited to a specific number of miles offshore but includes the areas within which Canada has the right to exercise its control with respect to certain offshore activities in connection with the exploration for and the exploitation of minerals, petroleum, natural gas and hydrocarbons.

Where a payment is made to a non-resident in respect of services provided in Canada, section 105 of the Regulations requires the payor to withhold 15 per cent of the payment. Therefore, where the services of a taxpayer are performed in connection with activities described in paragraph 255(b) and above the areas described in paragraph 255(a), the taxpayer is considered to have performed services in Canada for the purposes of section 105 of the Regulations.

2-) Meaning of the terms "Exploitation"& " Exploration"

In Dunbar v. The Queen (2005 TCC 769), Judge Miller explored the issue of what is meant by "exploitation" for the purposes of the Overseas Employment Tax Credit (the "OETC"). To him, "exploitation" meant more than simply extracting and selling. He stated that all stages necessary to take the natural resource to its maximum value for the pursuit of profit is part of the exploitation process and concluded that shipping crude oil to where it can be refined is part of that overall exploitation, especially so where measures have to be taken to ensure the crude arrives safely.

The Larter case¹ provides some further guidance as to what activities qualify for the OETC regarding work done in connection with a contract under which the employer carries on a business outside Canada "with respect to"² the exploration for or exploitation of petroleum, natural gas or minerals. Justice Mogan found that a university-sponsored scientific research ocean drilling program did not meet the requirements of this clause as the work done was not with respect to exploring for petroleum, natural gas or minerals notwithstanding that seismic testing was routinely performed to determine the possible existence of oil or natural gas in order to avoid drilling into it.

The facts in the Larter case are similar to the ones in the present case since, in both situations, the work was not done for the overall purpose of exploring for or exploiting of resources. This is even more true in the present case because unlike in the Larter case where some incidental testing for the existence of oil and natural gas was conducted the work done under the Program will not have anything to do with the determination of whether any resources are present on the continental shelf, no equipment will be lowered from a ship down to the seabed and there will be no collection of any type of bottom samples. Accordingly, it is clear that the work done by NRco cannot be viewed as exploration for or exploitation of petroleum, natural gas or related hydrocarbons for the purposes of paragraph 255 (b).

3-) Meaning of the words "In connection with"

The issue then is whether the fact that the information collected by NRco may be used to determine Canada's boundaries for the purpose of assessing its sovereignty over the petroleum and natural gas lying beneath the Atlantic can form a link sufficient to allow the work performed by NRco to be considered "in connection with" exploration for or exploitation of natural resources.

The meaning of the phrases "in respect of" and "in connection with" has been considered by the Supreme Court of Canada in Nowegijick, 83 DTC 5041. The Court stated:

"The words" in respect of" are in my opinion words of the widest possible scope. They import such meanings as "in relation to", "with reference to" or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters." Even if the expression "in connection with" has arguably a narrower scope than the expression "in respect of", it nonetheless has a broad connotation³ .

Our view is that even if we give to the terms "in connection with" the widest scope possible, the activities performed under the Program could not be considered to be performed "in connection with" or "in respect of" the exploration for or exploitation of the resources. While the work done by NRco will lead to delineation of the boundaries within which Canada has sovereignty over natural resources, it is not in any way linked to any such past, present or future activities conducted, or to be conducted within or without those boundaries. Indeed it would appear that any such activities would be conducted completely regardless of whether the activities of NRco are carried out.

Question 2

As it is our view that paragraph 255 (b) of the Act does not apply to your situation, one should refer to the Interpretation Act (the "IA") to find the meaning of "Canada" for the purposes of Canadian statutes.

Under subsection 35(1) of the IA, Canada, for greater certainty, includes the internal waters of Canada and the territorial sea of Canada as determined under the Oceans Act and the airspace above and the seabed and subsoil below those internal waters and territorial sea. In general terms, this embraces all waters and airspace within what is known as the 12 nautical mile limit. In our view, the provisions of section 8 of the IA do not apply in this case.

Therefore, provided that none of the services rendered by NRco are provided within this 12 mile limit, none of the fee charged to Canco by NRco will be considered as a payment made to a non-resident in respect of services provided in Canada pursuant to section 105 of the Regulations.

We hope that the above non-binding comments are of assistance.

Olli Laurikainen, C.A.

Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
ENDNOTES

¹ (2001) 1 CTC 2229

² The expression "with respect to" has arguably a broader meaning than "in connection with" in light of the Nowegijick case (see below). Despite that, the Court found that the activities were not "with respect to" the exploration for or exploitation of petroleum, natural gas or minerals.

³ Indeed, the expression "in connection with" was interpreted very broadly by the courts. See, for examples: Nanaimo Community Hotel Ltd c. British Columbia, (1944) CTC 105 and Seven Oaks Village Housing Co-op Ltd. C. McVarish (1991), 74 Man. R. (2d) 306.