13 February 1997 External T.I. 9701235 - SUBSTANTIAL CANADIAN PRESENCE

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:

1. a)whether amounts incurred by corporation for services provided by an independent contractor's employees or partners can be included in total of amounts incurred for services under 206(1.1)(d)(iii)(C);
1. b)whether cost of services provided under contract to independent contractor can be included in same total;
2)whether "services" include all activities that normally are considered "services" (except investment activities), e.g., legal & accounting firm services & underwriting services relating to offering of corporation's debt or shares;
3)whether amount billed by professional firm relating to firm's overhead can be included in same total;

4)whether disbursements billed by professional firm can be included in same total.

Position:

1). a)Yes;
1). b)Yes;
2)Yes;
3)Yes as a rule;

4)Question of fact but generally disbursements which are expenses incurred incidental to the services provided can be included; however may be a purchase of goods.

Reasons:

1)Routine - E9636295 & E9633825;
1. b)Logical extension - services provided by "other individuals" need not be directly contracted for by corporation but may be contracted for by middleman so long as services are provided "for or to" the corporation;
2)Confirmed generally in E963382A;

3)fees charged by professional firm build in margin to cover overhead of firm and portion is not separately identified. Whole amount is billed as an account for services rendered and represents the cost of obtaining the services of that firm's employees or partners;

4)disbursements incidental to services can generally be included in total amount incurred for services; but whole amount of bill submitted by professional firm re disbursements does not automatically qualify. Question of fact since some items incurred directly by corporation would not be considered amount incurred for services (filing and registration fees for example); see also E900479C for discussion of case law on M&P deduction not available where contract is for services;.

XXXXXXXXXX							970123

Attention: XXXXXXXXXX

February 13, 1997

Re: Substantial Canadian Presence Proposed Clause 206(1.1)(d)(iii)(C)

This is in reply to your facsimile transmission of January 15, 1997, in which you ask several questions concerning our interpretation of the above-noted proposed amendment (the "Clause") to the Income Tax Act (the "Act"). Your questions and our comments follow.

1.Question: In computing the $250,000 threshold may a corporation (the "relevant corporation") include amounts incurred by it when it contracts with another corporation or partnership (the "Service Provider") for services, which services are performed by the Service Provider's employees or partners or by other individuals with whom the Service Provider contracts?

Answer: We confirm our view as previously set out in technical interpretations E9636295 and E9633825 that where the relevant corporation enters into a contract with the Service Provider, the expenses paid by the relevant corporation relating to services rendered to or for the relevant corporation by employees or partners of the Service Provider may be included in computing the $250,000 threshold for purposes of the Clause.

Furthermore, it is also our view that where the Service Provider contracts for the services of other individuals, the expenses paid by the relevant corporation relating to the services of those individuals rendered to or for the relevant corporation may be included in computing the $250,000 threshold.

2.Question: Does the term "services", as used in the Clause, encompass all those activities which fall within the ordinary meaning of the word "services", except as specifically provided with respect to investment activities? In particular please confirm that the following types of services would qualify as "services (other than services relating to an investment activity) of employees and other individuals" for purposes of the Clause:

(a)Services performed for the relevant corporation by an independent legal or accounting firm; and

(b)Services performed for the relevant corporation by an independent underwriting firm in the context of an offering of shares, warrants and/or debt of the relevant corporation to the public, including commissions paid by the relevant corporation to the underwriters for the sale of the shares, warrants and/or debt of the relevant corporation to the public.

Answer: We confirm that it is our view that services performed under contract to or for the relevant corporation by an independent legal or accounting firm are included in the term "services" as used in the Clause, except to the extent that the services relate to an investment activity of the relevant corporation or another corporation with which the relevant corporation does not deal at arm's length.

It is also our view that the term "services" as used in the Clause include services performed under contract to or for the relevant corporation by an independent underwriting firm in the context of an offering of shares, warrants and/or debt of the relevant corporation to the public; the amount incurred for such services may include the commissions paid by the relevant corporation to the underwriters for their services rendered with respect to the sale of shares, warrants and/or debt of the relevant corporation to the public.

3.Question: Will the total fees billed by a law firm, underwriting firm or other independent professional firm be taken into account in determining whether the total amounts incurred by the relevant corporation for services exceeds $250,000 for purposes of the Clause where the bill reflects an amount on account of the firm's overhead expenses (such as rent, support staff, stationery and the like)?

Answer: In our view, where part of the fee billed by the independent professional firm represents an amount on account of the firm's overhead expenses, as a rule the total fee may be included in the total in determining whether the total amounts incurred by the relevant corporation for services exceeds $250,000 for purposes of the Clause.

4.Question: Where the professional firm bills "disbursements" (including items such as client-specific courier charges, filing fees, etc.) and "fees" separately, would both the fees and the disbursements be taken into account in determining the total amount incurred by the relevant corporation for purposes of the Clause, or just the fees?

Answer: Generally, where the service contracted for would require that the professional firm incur costs for such disbursements (i.e., the disbursement is an expense which is incidental to the services rendered) it may be included in determining the total amount incurred for services by the relevant corporation for purposes of the Clause. Thus, disbursements for courier charges, long-distance telephone calls, and copying charges which are incidental to the services contracted for may be included in the total amount incurred by the relevant corporation. However, filing and registration fees and the like paid by the professional firm would not normally constitute part of the amount incurred for services.

Please also note that the disbursement may be an amount paid pursuant to a contract for goods and may not be included in the total for the amount incurred for services. (Whether a contract is for services or for goods, or partly one and the other, depends on the intentions of the parties.)

With respect to 4 above, we have reviewed some of the caselaw you cited in our telephone conversation of January 28, 1997 (Spice/XXXXXXXXXX), in particular The King v. Boultbee Ltd. 1 DTC 443, Crown Tire Service Ltd. v. The Queen 83 DTC 5426 and Scott Maritimes Pulp Ltd. v. B.F. Goodrich Canada Ltd. et al. 72 DLR (3d) 680. In addition, please note Cabana, Seguin Inc. v. MNR 82 DTC 1360 which discusses whether a person is providing a service or involved in the sale of goods. (The decision was overturned by a Consent to Judgment of October 13, 1983, but on another point of law.) See also The Queen v. McGraw-Hill Ryerson Limited 82 DTC 6142. Where it is determined that a Service Provider or professional firm has entered into a contract for services with the relevant corporation (and not a contract for goods or of purchase and sale) please note that it does not cause the total amount charged under the contract to be an amount incurred for services for purposes of the Clause. For example, if the relevant corporation were to provide a cheque to the professional firm for payment of a filing or registration fee, it is our view that the amount would not be an amount incurred for services. The fact that the professional firm pays the filing or registration fee on behalf of the relevant corporation and charges it as a disbursement does not alter the character of the fee as being other than for services. Subject to the foregoing general comments in 4 above, it is a question of fact whether a particular disbursement can be included in the total amount incurred for services for purposes of the Clause.

Although the foregoing comments are not binding on the Department, we trust they will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch