2014-0549701I7 Obligation of Crown corporations to file a T106

Principal Issues: Whether a Crown corporation, federal or provincial, has to file a T106.

Position: Depends if it is acting as an agent of the Crown.

Reasons: Crown corporations acting as agents of the Crown, whether or not they are prescribed under Regulation 7100, are not required to file a T106 since Part XV of the Act does not apply to them.

Author: Larochelle, Sophie
Section: 27(1), 27(2), 149(1)(d), 150, 220(2.1), 233.1, 248(1) of the Act; 17 of the Interpretation Act.

                                                                                            March 15, 2016

Sandy Geier, CPA, CMA                                                     HEADQUARTERS
Senior International Auditor                                                Income Tax Rulings
International and Large Business Directorate                     Directorate
344 Slater Street, 6th Floor                                                 Sophie Larochelle
Ottawa, ON  K1A 0L5    
                                                                                            2014-054970

Obligation of a Crown corporation to file a T106

We are writing in response to your email dated September 22, 2014, wherein you asked us to comment on the obligation of a Crown corporation to file an information return (form T106) under section 233.1 of the Income Tax Act (the “Act”).

Unless otherwise noted, all statutory references herein are to the Act.

Our comments

What is a Crown corporation?

The Act refers to Crown corporations in three different ways.

1)    The expression “Crown corporation” is used in subsection 237(1) of the Income Tax Regulations (the “Regulations”) and is defined by reference to section 2 and, in turn, subsection 83(1), of the Financial Administration Act (the “FAA”). Subsection 83(1) of the FAA defines a “Crown corporation” as meaning a parent Crown corporation or a wholly-owned subsidiary. A “parent Crown corporation” is defined as a corporation that is wholly owned directly by the Crown. A “wholly-owned subsidiary” is defined as a corporation that is wholly owned by one or more parent Crown corporations directly or indirectly through any number of subsidiaries each of which is wholly owned directly or indirectly by one or more parent Crown corporations. Although the Crown is generally understood to mean Her Majesty in right of Canada or Her Majesty in right of a province, for the purposes of the FAA the term “Crown” refers only to Her Majesty in right of Canada.

2)    The expression “federal Crown corporation” (“FCC”) is used in subsection 27(1) and is not defined anywhere in the Act. However, it is our view that it is also to take its meaning from section 2 and subsection 83(1) of the FAA. In other words, a FCC is a corporation that is wholly owned directly or indirectly by Her Majesty in right of Canada.

3)    The expression “prescribed federal Crown corporation” (“PFCC”) is mainly used in subsection 27(2) and is, effectively, defined by the list contained in section 7100 of the Regulations.

For the remainder of this memo, references to “Crown corporation”, unless specified otherwise, are intended to include a corporation that is wholly owned, directly or indirectly, by Her Majesty in right of Canada or Her Majesty in right of a province.

How is a Crown corporation taxed?

In the absence of specific rules to the contrary, the Act applies to a Crown corporation the same way it does to any other corporation. However, there are rules that exempt some Crown corporations from some or all of the provisions of the Act. These rules are contained both in the Act as well as in the Interpretation Act (the “IA”).

Section 17 of the IA

Section 17 of the IA provides that “No enactment is binding on Her Majesty or affects Her Majesty’s rights or prerogatives in any manner, except as mentioned or referred to in the enactment”. The reference to Her Majesty in section 17 of the IA refers not only to the Crown in right of Canada but also to the Crown in right of a province. A Crown corporation is not generally considered to be one and the same as Her Majesty, since it is a separate legal person. However, many Crown corporations act as agents of the Crown and, on that basis, are immune from Canadian federal laws by virtue of section 17 of the IA. As noted by the Supreme Court of Canada in the case of Nova Scotia Power Inc. v. the Queen (footnote 1), there are two ways in which an entity can be an agent of the Crown. The first is where it is determined after a careful examination of the relationship between the parties that the Crown exercises sufficient control over it so that it can be said to be in de jure control. The second way is for the legislature to expressly legislate it to be an agent. However, this immunity only exists to the extent that the relevant entity is acting within the purposes for which the legislature has made it an agent of the Crown.

Therefore, a Crown corporation that is a provincial or federal Crown agent, acting within the purposes for which it has been made an agent of the Crown, is not subject to the provisions of the Act unless and to the extent explicitly provided otherwise. As discussed below, there are some provisions of the Act that provide otherwise, but only in respect of FCCs.

Subsection 27(1)

FCCs, acting as agents for Her Majesty, are specifically referred to in the Act at subsection 27(1), with respect to Part I of the Act. Furthermore, section 27 applies, with any modifications that the circumstances require, to Parts I.3, IV.1, VI and VI.1 of the Act pursuant to, respectively, sections 181.71, 187.61, 190.211 and subsection 191.4(3). Pursuant to subsection 27(1), any income or loss from a business carried on by a FCC as an agent of the Crown is deemed to be its own income or loss. Thus, in our view, subsection 27(1) has the effect of overriding section 17 of the IA, subjecting a FCC acting as an agent of the Crown to Part I and, indirectly, as noted above, to Parts I.3, IV.1, VI and VI.1 of the Act. However, notwithstanding this override of section 17 of the IA, FCCs can still be exempt from tax otherwise payable under Part I of the Act by virtue of subsection 149(1), as discussed immediately below.

Paragraphs 149(1)(d) to (d.4) and subsection 27(2)

Paragraphs 149(1)(d) to (d.4) provide exemptions from tax payable under Part I of the Act by a corporation under various direct and indirect Crown ownership scenarios, subject to certain exceptions (footnote 2) contained in section 149. A further exception is provided in subsection 27(2) in respect of PFCCs and any corporation controlled by such a corporation. As noted above, PFCCs are those listed in section 7100 of the Regulations. Thus, by a combination of subsections 27(1) and (2), PFCCs are generally taxable under Part I of the Act, whether or not they are acting as agents for the Crown.

Requirement to file a T106

The requirement to file form T106 – Information return of non-arm’s length transactions with non-residents for a particular taxation year is governed by section 233.1, which falls under Part XV of the Act. Form T106 must be filed with the Minister of National Revenue by a “reporting person” unless the de minimis exception in subsection 233.1(4) applies. A “reporting person” generally includes any person that is resident in Canada at any time in the year, but it also includes certain non-residents that carry on a business in Canada in the year. Thus, subject to the discussion below in respect of Crown agents, any Crown corporation that is resident in Canada would generally be required to file form T106 for any year in which it has business transactions with a non-arm’s length non-resident. Although subsection 220(2.1) could conceivably provide for a waiver of this requirement, it is our understanding that no such general waiver has been granted in respect of Crown corporations.

As noted above, a Crown corporation that is a provincial or federal Crown agent, acting within the purposes for which it has been made an agent of the Crown, is not subject to any of the provisions of the Act unless and to the extent explicitly provided otherwise. There is no provision of the Act that explicitly provides otherwise in respect of section 233.1 (i.e. form T106). In this regard, we note two things. First, subsection 27(1) only overrides section 17 of the IA in respect of Part I of the Act (footnote 3). Second, if Parliament had intended for such Crown agents to be required to file form T106 it would have specifically subjected them to Part XV of the Act, as it has done for Parts I.3, IV.1, VI and VI.1.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.

We trust that these comments will be of assistance, and thank you for your enquiry.

Dave Beaulne, CPA, CA
Section Manager
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  2004 SCC 51.
2  For example, subsection 149(1.1) provides an exception for certain situations where a person other than the federal government, a province or a municipality has the right to acquire shares or capital of the corporation.
3  Furthermore, this subsection is an overriding provision solely in respect of FCCs.

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