9 February 1999 External T.I. 9808995 - LCT ON NON-RESIDENT CORPORATIONS

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. Use of offshore drilling vessels in Canada by a non-resident corporation and the computation of tax under Part I.3 of the Act. Is the full carrying value included in the base without pro-ration?

2.Is Canadian GAAP required?

Position: General comments but yes to 1 and a qualified no for 2 based on facts.

Reasons: The law.

XXXXXXXXXX 								980899

Attention: XXXXXXXXXX

February 9, 1999

Dear Sirs:

Re: Large Corporation Tax on Non-Resident Corporations

This is in reply to your letter dated April 3, 1998 and our telephone conversation (Cooke/XXXXXXXXXX ) on December 7, 1998 wherein you requested our views on the application of Part I.3 of the Income Tax Act (the "Act") to non-resident corporations.

We understand from the situation described in your letter that a non-resident corporation carrying on a business in Canada is considered to have a "permanent establishment" in Canada for the purpose of Part I.3 of the Act where it uses an offshore drilling vessel in Canada for a very short period of time such as one month. You indicate that where this occurs it appears that the full carrying value the offshore drilling rig must be included in the non-resident corporation’s capital tax base under Part I.3 of the Act notwithstanding the fact that the particular asset may have only been used for only one month in Canada. You have requested our views on this situation and how a non-resident corporation’s liability for Part I.3 tax may be affected by the existence of an income tax treaty between the non-resident’s country of residence and Canada. You have also asked whether a non-resident corporation is required to follow generally accepted accounting principles (“GAAP”) under Canadian rules for the purpose of Part I.3 of the Act or can it follow the GAAP of their country of residence.

While you have phrased the situation described in your letter in a general manner your request appears to relate to a fact situation involving a specific taxpayer. In order to properly address a situation of this nature we would require a complete understanding of all the relevant facts , information concerning the nature of the non-resident corporation’s activities both inside and outside of Canada and the particular country of residence of the corporation. In this regard, confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling should be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (“IC 70-6R3”) dated December 30, 1996, issued by Revenue Canada. Confirmation of the income tax consequences of completed transactions must be referred to the appropriate tax services office. Although we are not able to comment specifically on the situation you have provided, we can offer some very general comments.

While subsection 181.1(1) of the Act provides that every corporation shall pay tax under Part I.3 (at a rate of 2.25%) to the extent its taxable capital employed in Canada for the year exceeds its capital deduction for the year, pursuant to paragraph 181.1(3) of the Act this tax is not payable by a corporation that was neither resident in Canada nor carried on business through a permanent establishment in Canada at any time in the year. As noted in your letter for the purpose of Part I.3 of the Act the term “permanent establishment” has the same meaning as in subsection 400(2) of the Income Tax Regulations to the Act.

As alluded to above, the determination as to whether a particular non-resident corporation is considered to be carrying on a business in Canada and whether that business if carried on in Canada is carried on through a permanent establishment in Canada are questions of fact that can only be determined on a case by case basis. In this regard, where a non-resident corporation carries out activities that are described in the definition of “principal-business corporation” in subsection 66(15) of the Act by using a offshore drilling vessel in Canada, even for a very limited period of time, such a corporation would be considered to be carrying on a business in Canada through a permanent establishment for the purpose of the Act, including Part I.3.

Once a particular non-resident’s tax liability has been established under the Act one may look to the terms of a particular tax treaty, if one exists, to determine what, if any, relief from such taxation may be available. In this regard, tax treaties are not a taxing statutes and can neither be used to subject any taxpayer to taxation that is not otherwise provided for under the Act nor deny a taxpayer of any rights or benefits which the taxpayer may otherwise enjoy under the Act. As such, tax treaties are strictly relieving in nature and if a particular tax treaty is silent with respect to the taxation of capital then the taxpayer’s exposure to Part I.3 tax in Canada will be based on its liability as determined under the Act.

Where a non-resident corporation is subject to tax under Part I.3 of the Act the full carrying value of its assets at the end of a year that were used by it in the year in, or held by it in the year in the course of carrying on any business in Canada must be included in the non-resident corporation’s capital tax base under Part I.3 of the Act notwithstanding the fact that the particular asset may have only been used for a short time in Canada.

Finally, subsection 181(3) of the Act requires, inter alia, that for the purpose of determining a non-resident corporation’s taxable capital employed in Canada the amounts must be reflected on the balance sheet that it presents to its shareholders in accordance with GAAP. It is our view that for the purposes of subsection 181(3) the reference to GAAP in such circumstances does not necessarily mean GAAP under Canadian rules.

While we trust that our comments will be of assistance to you as indicated in paragraph 22 of IC-70-6R3 this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

Yours truly,

Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings
and Interpretations Directorate
Policy & Legislation Branch