7 March 1991 Income Tax Severed Letter - Canada-U.S. Income Tax Convention - Whether a Person was Carrying on Business and Had a Permanent Establishment

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.

Dear Sirs:

Re: Article XIII (9) of the Canada-United States Income Tax Convention, 1980 (the "Convention")

This is in reply to your letter dated January 11, 1991 whereby you requested our views concerning whether a farm owned by a resident of the United States would constitute "an asset that on September 30, 1980 formed part of the business property of a permanent establishment situated in [Canada]" within the meaning of subparagraph (c) of paragraph 9 of Article XIII of the Convention.

A determination of whether a person was carrying on business and had a permanent establishment can only be determined after an analysis of all of the relevant facts. Accordingly, we cannot comment with regard to the person referred to in your letter. We recommend that you take up the matter with the District Taxation Office for the area in which the property is situated. We can, however, offer the following general comments with regard to this matter.

• 1. We do not agree with the following statement made in your letter:

"Where a person resident in the United States carries on activities in canada with no reasonable expectation of profit, he is not carrying on business in Canada and hence cannot have a fixed place of business or permanent establishment in Canada."

We also do not agree with the following statement made by Richard G. Tremblay in his paper Permanent Establishments in Canada, 1989 Conf. Rep. at 38:16 cited in your letter:

"Thus, where a person not resident in Canada carries on activities with no reasonable expectation of profit, he is likely not carrying on business in Canada (and hence cannot have a fixed place of business in Canada), even if his non-Canadian operations do qualify as a business."

In our opinion it is inappropriate to isolate specific activities that constitute some of the activities involved in carrying on a business and maintain that such activities do not constitute carrying on business because they do not themselves directly produce income. Paragraph 1 of Article V of the Convention expressly recognizes that a person may have a permanent establishment in a Contracting State where the business is only partly carried on. The part of the business carried on in a particular Contracting State (e.g. the "activities" carried on in a State) may not directly produce income (e.g. no sales may be made in the particular Contracting State); yet, nonetheless, the person may be carrying on business in the particular Contracting State and may have a permanent establishment therein. Section 253 of the Canadian Income Tax Act (the "Act") also confirms our opinion in this regard and defeats the argument that a business is not carried on in Canada where the part of the business (e.g. the "activity") carried on in Canada does not directly produce revenue or net income.

• 2. In our opinion, section 253 of the Act is principally directed at determining where a business is to be considered to be carried on (i.e. in Canada) rather than whether a business is carried on. For example, if a non-resident owns a cottage in Canada and grows a small plot of vegetables for personal consumption on the cottage property while vacationing at the cottage, the growing of such vegetables would not in and of itself result in the non-resident being deemed to carry on business in Canada pursuant to section 253.
• 3. As indicated by paragraph 2 of IT-177R, an establishment is not a "permanent establishment" unless a business is connected with it and the ownership of a farm does not constitute a permanent establishment of the owner unless it is used in the owner's business.
• 4. It is essentially a question of act whether a person is carrying on business. The Department's views on this question in the context of farming are discussed in IT-322R.
• 5. In our view the references to "a redeemable expectation of profit" in the decisions of the Courts concerning section 31 of the Act arose because of the need to determine whether various expenses under consideration in those cases were "personal or living expenses" as that term is defined in subsection 248(1) of the Act and not because as a matter of law a reasonable expectation of profit is a requirement for the existence of a "business" as that term is defined for purposes of the Act (and thus also for purposes of the Convention). However, while not in and of itself determinative, whether there is a reasonable expectation of profit will be a factor to be considered in determining whether there is a business.