2019-0800191R3 Carrying on business in Canada.

Principal Issues: Whether the provision of XXXXXXXXXX services by a Canadian-resident corporation to related non-resident entities will cause the related non-resident entities to be considered to carry on business in Canada.

Position: No.

Reasons: XXXXXXXXXX.

Author: XXXXXXXXXX
Section: 2(3)(b); 115(1); 248(1) “business”; 253.

XXXXXXXXXX                                                               2019-080019

XXXXXXXXXX

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
      XXXXXXXXXX

This is in response to your XXXXXXXXXX request, as amended and updated on XXXXXXXXXX, for an advance income tax ruling on behalf of the above-noted taxpayer.

   We understand that to the best of your knowledge and that of the responsible officers of the parties involved, none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

(a) in a previously filed return of the taxpayer or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(c) under objection by the taxpayer or a related person;

(d) the subject of a current or completed court process involving the taxpayer or a related person; or

(e) the subject of a ruling previously considered by the Income Tax Rulings Directorate in relation to the taxpayer or a related person, other than as described in paragraphs 8 to 10 below.

Unless otherwise noted, all references herein to sections or components thereof are references to the Income Tax Act (Canada), R.S.C. 1985, c. 1 (5th Supp.), as amended (the “Act”).

The ruling given herein (the “Ruling”) is based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your advance income tax ruling request do not form part of the facts and proposed transactions on which the Ruling is based and any reference to these documents is provided solely for the convenience of the reader.

DEFINITIONS

In this document, the following terms have the meaning specified herein, unless otherwise specified:

“Audit Services” means the services of an internal audit manager and the internal audit services including: (i) identification and risk assessment of Top Foreignco and the Top Foreignco Non-Resident Group’s global structure, activities and processes; (ii) development and implementation of an annual audit plan, as approved, including any special tasks or projects requested; (iii) maintenance of a professional audit function with sufficient knowledge, skills, experience and professional certifications to meet the standards required by the Institute of Internal Auditors; (iv) evaluation and assessment of significant merging/consolidating functions and new or changing services, processes, operations and control processes coincident with their development, implementation and/or expansion across all jurisdictions; (v) issuance of quarterly reports that summarize the results of audit activities; (vi) informing Top Foreignco and the Top Foreignco Non-Resident Group of emerging trends and successful practices in internal auditing; (vii) assistance with the investigation of significant suspected fraudulent activities and notification of Top Foreignco and the Top Foreignco Non-Resident Group of the results; and (viii) consideration of the scope of work of the external auditors and regulators, as appropriate, for the purpose of providing optimal audit coverage at a reasonable cost;

“Canco” means XXXXXXXXXX;

“Computer Services” means the use of a server located in XXXXXXXXXX (Province) owned by Canco for internal and external web hosting (Canco hosts Top Foreignco’s website), electronic mail, time and billing systems, design program development services, maintenance of client data systems (data storage and backup, restore and patching services) and central network management (enterprise and network architecture) and support services (user training, and help desk);

“Computer Services Agreement” means the services agreement entered into between Top Foreignco and Canco on XXXXXXXXXX, which provides that Canco may provide the Computer Services to Top Foreignco and the Top Foreignco Non-Resident Group;

“CRA” means the Canada Revenue Agency;

“Foreign Countries” means XXXXXXXXXX;

“Foreign Country 1” means XXXXXXXXXX;

“Foreign Country 2” means XXXXXXXXXX;

“Foreignco” means XXXXXXXXXX;

“New Services Agreement” means the agreement described in Paragraphs 14 and 15;

“non-resident” has the meaning assigned by subsection 248(1) of the Act;

“Other Services Agreement” means the services agreement entered into between Top Foreignco and Canco on XXXXXXXXXX, which provides that Canco may provide the Other Support Services and Audit Services to Top Foreignco and the Top Foreignco Non-Resident Group;

“Other Support Services” means accounting, financial, anti-money laundering, compliance, administrative support, XXXXXXXXXX, information resources management and marketing services;

“Province” means XXXXXXXXXX;

“related persons” has the meaning assigned by subsection 251(2) of the Act;

“Services” means the Computer Services, Audit Services, and Other Support Services which are provided by Canco under the Services Agreements;

“Services Agreements” means the Computer Services Agreement and the Other Services Agreement;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1) of the Act;

“Top Foreignco” means XXXXXXXXXX; and

“Top Foreignco Non-Resident Group" means the direct and indirect affiliates of Top Foreignco that are non-residents of Canada including (but not limited to):

XXXXXXXXXX.

FACTS

1. Top Foreignco is a company formed under the laws of Foreign Country 1. Foreignco and each member of the Top Foreignco Non-Resident Group is a non-resident who is a direct or indirect affiliate of Top Foreignco.

2. Foreignco is a holding company incorporated under the laws of Foreign Country 2. All of the issued and outstanding shares of Foreignco are owned directly or indirectly by members/shareholders of Top Foreignco and the Top Foreignco Non-Resident Group.

3. Top Foreignco, Foreignco, and each member of the Top Foreignco Non-Resident Group do not have offices in Canada, do not use the offices of Canco to conduct any business in Canada, do not have any employees in Canada, do not sign or negotiate any contracts in Canada, do not solicit or offer anything for sale in Canada, do not engage in any other business activity in Canada and do not have an agent who has the authority to conclude contracts on its behalf present in Canada.

4. Canco is a taxable Canadian corporation incorporated under the laws of the Province and all of the issued and outstanding shares of Canco are held by Foreignco. Canco carries on business in Canada and uses its own employees to provide the Services to Top Foreignco, Foreignco, and the Top Foreignco Non-Resident Group.

5. Canco offers its own services and does not offer any service or product of Top Foreignco, Foreignco, or the Top Foreignco Non-Resident Group’s in Canada. Other than for the receipt and payment of funds, is not an agent of Top Foreignco, Foreignco, or any member of the Top Foreignco Non-Resident Group.

6. The Services Agreements specify that Canco does not have the authority to execute or deliver any contract, agreement or instrument in the name of, or on behalf of, Top Foreignco, Foreignco, or any member of the Top Foreignco Non-Resident Group and, other than for the receipt and payment of funds, cannot act as an agent of Top Foreignco, Foreignco, or any member of the Top Foreignco Non-Resident Group. Furthermore, the Services Agreements provide that Canco cannot assume or create any obligation, liability or responsibility whatsoever, express or implied, on behalf of or in the name of Top Foreignco, Foreignco, or any member of the Top Foreignco Non-Resident Group. The authority of Canco to act for Top Foreignco, Foreignco, and/or any member of the Top Foreignco Non-Resident Group is limited solely to the matters specifically set forth in the Services Agreements. The Services Agreements provide that Canco will receive a commercially reasonable fee for the provision of its services to Top Foreignco, Foreignco, and/or any member of the Top Foreignco Non-Resident Group.

7. All of the directors of Top Foreignco, Foreignco, and each member of the Top Foreignco Non-Resident Group are non-residents and all of the directors’ meetings are held outside of Canada. The business decisions of Top Foreignco, Foreignco and each member of the Top Foreignco Non-Resident Group are made outside of Canada and no employee of Canco is involved in making such business decisions.

8. On XXXXXXXXXX, Top Foreignco received an advance income tax ruling from the XXXXXXXXXX the Income Tax Rulings Directorate of the CRA which stated that Canco’s provision of the XXXXXXXXXX, in and by themselves, would not cause Top Foreignco to be carrying on business in Canada for the purposes of paragraph 2(3)(b) or subsection 115(1) of the Act XXXXXXXXXX.

9. On XXXXXXXXXX, Top Foreignco received an advance income tax ruling from the XXXXXXXXXX Income Tax Rulings Directorate of the CRA which stated that Canco’s provision of the Other Support Services, in and by themselves, would not cause Top Foreignco to be carrying on business in Canada for the purposes of paragraph 2(3)(b) or subsection 115(1) of the Act XXXXXXXXXX.

10. On XXXXXXXXXX, Top Foreignco received an advance income tax ruling from the XXXXXXXXXX Income Tax Rulings Directorate of the CRA which stated that Canco’s provision of the Audit Services, in and by themselves, would not cause Top Foreignco to be carrying on business in Canada for the purposes of paragraph 2(3)(b) or subsection 115(1) of the Act XXXXXXXXXX.

11. Top Foreignco and the Top Foreignco Non-Resident Group provide XXXXXXXXXX services XXXXXXXXXX.

12. Canco provides Computer Services to Top Foreignco and the Top Foreignco Non-Resident Group.

13. The Top Foreignco’s website hosted on Canco’s server is primarily informational and outlines (i) the services provided by Top Foreignco and the Top Foreignco Non-Resident Group to clients, and (ii) contact information for the employees of Top Foreignco and the Top Foreignco Non-Resident Group. The members of the Top Foreignco Non-Resident Group use Top Foreignco’s website to advertise their services and do not have separate websites.

PROPOSED TRANSACTIONS

14. The Services Agreements will be terminated and Canco will enter into a new services agreement with Foreignco as the signatory rather than Top Foreignco. The terms and conditions of the New Services Agreement will be substantially similar to the Services Agreements and identical in all substantial aspects (other than XXXXXXXXXX services, which have not previously been performed by Canco, and will no longer be included as an Other Support Service). Canco will continue to provide the Services to Foreignco, Top Foreignco and the Top Foreignco Non-Resident Group in consideration for a commercially reasonable fee.  

15. The New Services Agreement will specify that Canco continues not having the authority to execute or deliver any contract, agreement or instrument in the name of, or on behalf of, Foreignco, Top Foreignco or a member of the Top Foreignco Non-Resident Group and, other than for the receipt and payment of funds, to act as an agent of Foreignco, Top Foreignco, or a member of the Top Foreignco Non-Resident Group.

Furthermore, the New Services Agreement will provide that Canco will continue not having the authority to assume or create any obligation, liability or responsibility whatsoever, express or implied, on behalf of or in the name of Foreignco, Top Foreignco, or any member of the Top Foreignco Non-Resident Group.

The authority of Canco to act for Foreignco, Top Foreignco or any member of the Top Foreignco Non-Resident Group will continue to be limited solely to the matters specifically set forth in the New Services Agreement.

The New Services Agreement will provide that Canco will receive a commercially reasonable fee from Foreignco for the provision of its services to Foreignco, Top Foreignco, and any member of the Top Foreignco Non-Resident Group.

16. Subsequent to the execution of the New Services Agreement, Foreignco, Top Foreignco and the Top Foreignco Non-Resident Group will not sign or negotiate any contract in Canada, will not engage in any profit-producing activity in Canada, will not solicit or offer anything for sale in Canada, will not have an agent who has the authority to conclude contracts on its behalf present in Canada, and will not use the offices of Canco to conduct any business in Canada.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to more accurately reflect the new global organizational structure of Top Foreignco and the Top Foreignco Non-Resident Group. In particular, Foreignco is the global signatory to a multitude of service contracts outside of Canada. As such, the proposed transactions are intended to make the Services Agreement consistent with this model.

ADDITIONAL REPRESENTATIONS

Canco will continue not offering any services or products of Foreignco, Top Foreignco, or the Top Foreignco Non-Resident Group’s in Canada and, other than for the receipt and payment of funds, will not act as an agent of Foreignco, Top Foreignco, or the Top Foreignco Non-Resident Group.

All of the directors of Foreignco, Top Foreignco and the Top Foreignco Non-Resident Group will continue to be non-residents and all of the directors’ meetings of Foreignco, Top Foreignco, and the Top Foreignco Non-Resident Group will continue to be held outside of Canada.

The business decisions of Foreignco, Top Foreignco and the Top Foreignco Non-Resident Group will continue to be made outside of Canada and no employee of Canco will be involved in making such business decisions.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our Ruling is as follows:

A. Canco’s provision of the services to Foreignco, Top Foreignco, and the Top Foreignco Non-Resident Group pursuant to the New Services Agreement, in and by itself, will not cause Foreignco, Top Foreignco, or any member of the Top Foreignco Non-Resident Group to be carrying on business in Canada for the purposes of paragraph 2(3)(b) and subsection 115(1).

This Ruling is given subject to the limitations and qualifications set out in Information Circular IC70-6R11, issued by the CRA on April 1, 2021, and is binding on the CRA provided that the New Services Agreement is implemented before XXXXXXXXXX.

Except as expressly stated, this Ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, nothing in this Ruling should be construed as implying that the CRA:

(a) has reviewed, or agreed to, the reasonableness of any fees, as described in paragraph 6 above, that will be paid to Canco pursuant to the New Services Agreement;

(b) has reviewed, or agreed to, the application of section 247 of the Act to the fees, as described in paragraph 6 above, that will be paid to Canco pursuant to the New Services Agreement; or

(c) has, except for the determination that Canco’s provision of the XXXXXXXXXX, the Other Support Services and the Audit Services have not, in and by themselves, caused Foreignco, Top Foreignco or any member of the Top Foreignco Non-Resident Group to be carrying on business in Canada, determined whether Foreignco, Top Foreignco or any member of the Top Foreignco Non-Resident Group is carrying on business in Canada, including through any other services provided by Canco.

The above-noted Ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the Ruling provided herein.

Yours truly,

Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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