2020-0869451E5 CEWS 81(1)(c) and treaty exempt entities

Principal Issues: Whether an international shipping corporation who carries on business in Canada, who is deemed by subsection 250(6) to not be a resident in Canada, and a part or all of whose income is not included in income under Part I by way of the operation of paragraph 81(1)(c) may qualify as an “eligible entity” under subsection 125.7(1).

Position: Such an international shipping corporation may qualify as an “eligible entity”

Reasons: Such an international shipping corporation is not a corporation that is exempt from tax under Part I as contemplated in paragraph (a) of the definition of “eligible entity” under subsection 125.7(1).

Author: Tu, Grace
Section: 125.7(1), 81(1)(c), 250(6)

XXXXXXXXXX                                                                             2020-086945

    Grace Tu

December 22, 2020

Dear XXXXXXXXXX,

You have asked us to confirm whether a non-resident corporation that is carrying on business in Canada and operating as a shipping company engaged in XXXXXXXXXX can qualify as an “eligible entity” under subsection 125.7(1) of the Income Tax Act (the “Act”), notwithstanding that the corporation is deemed not to be resident in Canada at any time in the year pursuant to the application of subsection 250(6), and notwithstanding that a part or all of its income may not be included in computing its income for a taxation year pursuant to the application of paragraph 81(1)(c) of the Act.

Our comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R10, Advance Income Tax Rulings and Technical Interpretations.

The interpretive issue surrounds the definition of “eligible entity” under subsection 125.7(1). Paragraph (a) of that definition includes “a corporation, other than a corporation that is exempt from tax under this Part or is a public institution”.

In interpreting the phrase “a corporation that is exempt from tax under this Part” under subsection 125.7(1), we note that while subsection 81(1) excludes certain amounts from the computation of income, subsection 149(1) exempts taxable income of specific types of “persons”.

In the example of an international shipping corporation that is deemed to be non-resident of Canada under subsection 250(6), its Canadian-sourced income may be excluded from the computation of its income for Part I on the basis that its income meets the conditions under paragraph 81(1)(c), including a condition that the country in which the corporation is resident must grant substantially similar relief for the year to persons resident in Canada. Unlike the different persons described under subsection 149(1), the international shipping corporation is not itself exempt from tax solely because it is a specific type of entities

The words “exempt from tax” appear in a number of provisions of the Act and their interpretation might be informed by the context and the purpose of the provisions in which they appear.

In the context of section 125.7, a careful review of other paragraphs under the definition of “eligible entity” and of the overall context and purpose of the provision shows that the exclusion in paragraph (a) was meant to exclude, generally, corporations described under subsection 149(1) while providing under paragraph (d) of that definition that certain persons that are exempt under subsection 149(1) can qualify as an “eligible entity”.

In our view, an international shipping corporation that is deemed to be non-resident in Canada under subsection 250(6) and a part or all of whose Canadian source income is not included in the computation of its income under Part I of the Act as a result of the operation of paragraph 81(1)(c) is not a corporation “exempt from tax under Part I” under the definition of “eligible entity” in subsection 125.7(1) and therefore would not be prevented from being an “eligible entity” on that basis.





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

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