Principal Issues: Whether a non-resident corporate taxpayer is subject to tax in Ontario on income earned from leasing its Canadian property to a wholly-owned subsidiary with branch offices in Ontario?
Position: Non-resident taxpayer will likely not have to file a federal or Ontario tax return unless the taxpayer has a permanent establishment in Ontario.
Reasons: The Taxation Act, 2007 legislative requirements represent a significant change from the CTA position. The impact of this change means that a non-resident corporation without a permanent establishment in Ontario is no longer subject to Ontario corporate taxes even if it owns real estate, a timber resource property or a timber limit in Ontario from which it earns income.
XXXXXXXXXX 2011-041482 K. Podor March 2, 2012
Dear XXXXXXXXXX :
Re: Ontario Tax Liability
This is in response to your fax dated July 22, 2011, wherein you requested confirmation of your Ontario tax liability under the Federal and Ontario harmonized tax administration for taxation years ending after December 31, 2008. We apologise for the delay in our reply.
Comments:
The facts provided in your correspondence indicate that you are a non-resident corporate taxpayer that owns building and land ("Canadian property") in Ontario. You lease your Canadian property to one of the Ontario branch offices of your wholly-owned subsidiary, a non-resident LLC. Prior to January 1, 2009, you were subject to tax under the Ontario Corporations Tax Act (CTA) and the federal Income Tax Act (ITA). After December 31, 2008, you are subject to both the ITA and Ontario's Taxation Act, 2007 (TA).
Under the CTA, a non-resident corporation who owned real property located in Ontario from which it earned rental income was liable to pay Ontario corporate tax. The carrying on of a business through a permanent establishment (PE) in Ontario was not required.
The liability to pay tax under the TA, on this basis, has significantly changed from the imposition of the liability under the Ontario CTA. The impact of this change means that a non-resident corporation without a PE in Ontario is no longer subject to Ontario corporate taxes even if it owns real estate, a timber resource property or a timber limit in Ontario from which it earns property income. This change harmonizes Ontario with the Federal rules.
For taxation years ending after December 31, 2008, every corporation that has a PE in Ontario at any time in a tax year is liable to pay taxes on its Ontario taxable income.
The tax treatment of rental income earned by a non-resident person depends upon whether or not the rental operation is considered to be a business carried on in Canada. Where the rental operation is not considered to be a business, the gross rental income is subject to non-resident withholding tax pursuant to paragraph 212(1)(d) of the ITA. Alternatively, the non-resident person may elect under section 216 to file an income tax return and pay tax under Part I on the rental income, at the tax rates applicable to a person resident in Canada, but without being allowed any deductions from that income for the purpose of computing taxable income (i.e., Division C deductions). Please refer to Interpretation Bulletin (IT)-393R2, "Election re Tax on Rents and Timber Royalties - Non-Residents" and Information Circular (IC) 77-16R4, "Non-Resident Income Tax", for more information.
Where a business is considered to exist, taxable income earned in Canada will generally be computed pursuant to subsection 115(1) of the Act and the non-resident person will be taxable under Part I of the Act. In this situation, the non-resident would be required to file a T2 Corporation Income Tax Return.
We trust these comments are helpful.
Lita Krantz, CA
Assistant Director
International Division/ Division des opérations internationales
International Section III
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch