2014-0560831I7 International shipping

Principal Issues: (1) Whether the activities of a non-resident qualify as the "operation of a ship in international traffic" under former paragraph 81(1)(c). (2) Whether those same activities qualify as "international shipping" under new paragraph 81(1)(c).

Position: (1) Yes, provided those activities constitute the "commercial management" of the ship. (2) The new legislation does not change our position.

Reasons: (1) Consistent with previous positions. (2) The term "leased" used in the definition "international shipping" in subsection 248(1) includes certain ship chartering arrangements.

Author: Grondin, Yves
Section: 81(1)(c); 248(1) "international shipping"

                                                            December 24, 2015

XXXXXXXXXX TSO                           HEADQUARTERS            
                                                            Income Tax Rulings
                                                            Directorate
Attention: XXXXXXXXXX                    Yves Grondin

                                                             2014-056083

International shipping

We are writing in response to your memorandum of October 16, 2014 wherein you requested our views in respect of certain aspects of the international shipping exemption contained in paragraph 81(1)(c) in order to help you determine whether that exemption may apply to the activities carried on in Canada by XXXXXXXXXX (the “Taxpayer”).

Unless otherwise stated, all statutory references in this letter are to the Income Tax Act.

Facts

The facts, as we understand them, are as follows:

1.    The Taxpayer is a non-resident corporation that carries on business in many countries, including Canada. The Taxpayer is resident in XXXXXXXXXX for the purposes of the Income Tax Act and the Canada-XXXXXXXXXX Income Tax Convention.

2.    The Taxpayer’s activities carried on in Canada consist primarily of XXXXXXXXXX, in order to satisfy the shipping requirements of certain related companies – XXXXXXXXXX (the “Related Party Customers”) XXXXXXXXXX.

3.    The Related Party Customers are generally either residents of Canada or non-residents carrying on business in Canada and none of them can be considered to be, themselves, in the shipping business.

Questions

1) You would like our views as to whether the Taxpayer’s activities carried on in Canada can be considered “the operation of a ship in international traffic” as that expression is used in the version of paragraph 81(1)(c) that applies to taxation years that begin before July 13, 2013.

2) You would also like our views as to whether those same activities can be considered “international shipping” as that expression is used in the version of paragraph 81(1)(c) that applies to taxation years that begin after July 12, 2013 and, in particular, whether the various chartering arrangements entered into by the Taxpayer can be considered “leases” in the context of the new definition “international shipping” in subsection 248(1).

Comments

1) Our views in respect of the activities that would constitute the “operation of a ship” as contemplated by the former version of paragraph 81(1)(c) are dealt with comprehensively in Technical Interpretation 2009-0342101E5 (the “TI”). Our views in this regard have not changed and we refer you to the TI in order to give you greater context for our comments that follow.

In the context of your specific fact pattern it seems fairly clear that the Taxpayer never has management of the ships’ operations, in that it is not responsible for the crew nor the service and maintenance of the ships. In other words, and using the terminology adopted in the TI, the Taxpayer does not have the “Technical Management” of the ships. However, that is not necessarily determinative as to whether the Taxpayer’s activities carried on in Canada might constitute the “operation of a ship” as this requirement could also be met where the Taxpayer has the so-called “Commercial Management” of the ships.

It continues to be our view that Commercial Management of a ship means the right to exploit the earning capacity of the ship and that such right does not necessarily go hand in hand with the responsibility for the crewing and maintenance of the ship. In other words, where the Technical Management of the ship is carried out by one party and the Commercial Management is carried out by another, both parties would be considered to be operating the same ship, within the context of former paragraph 81(1)(c).

Determining whether a company has the Commercial Management of a ship requires an analysis of all of the relevant facts and the contractual arrangements between the relevant parties. As such, we are unable to express a definitive view in respect of the Taxpayer’s purported international shipping activities. However, in order to be considered to have the Commercial Management of the ship, the Taxpayer would need to demonstrate that the ship owner is operating the ship under the Taxpayer’s direction and not, in effect, under the direction of the Related Party Customers. Thus, if the Taxpayer is essentially acting as an agent or broker between the Related Party Customers and the ship owner/operator, we would not generally view the Taxpayer as having the Commercial Management of the ship.

2) Effective for taxation years that begin after July 12, 2013, the international shipping rules in the Income Tax Act have undergone some changes. In particular, the exemption in paragraph 81(1)(c) must now be read in conjunction with the definition “international shipping” in subsection 248(1). Such definition has introduced what may be considered to be a new requirement that the ships must be “owned or leased” by the relevant taxpayer in order for the taxpayer to be considered to be in the business of international shipping.

It is our understanding that the general intention of these legislative amendments was to clarify certain aspects of the international shipping rules and to broaden their scope in order to accommodate the structures of modern shipping organizations. By inference, these amendments were not intended to effect any significant scope limitations. It is also our understanding that the international shipping industry often uses the term “lease” in the context of various chartering arrangements, such as so-called “time charters”. In light of the above, we are of the general view that the term “lease” as used in the specific context of the international shipping rules would include chartering arrangements whereby taxpayers do not have the Technical Management of the ship but do have the Commercial Management of the ship. As such, we are of the view that the Taxpayer may continue to qualify for the international shipping exemption in taxation years that begin after July 12, 2013 on the same basis as for taxation years beginning before that time, that is, provided that the Taxpayer has the Commercial Management of the ship.

Unless exempted, a copy of this letter will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day waiting period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the Taxpayer. The Taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca, in which case a copy will be sent to you for delivery to the Taxpayer.

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

Yours truly,

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

cc.   Leslie Bafia
        Legislative Applications Section
        Large Business Audit Division
        ILBD/CPB

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