Principal Issues: Whether a non-resident corporation is required to file federal or provincial tax return if its only activity relates to the sale of partnership interests to Canadian residents
Position: No.
Reasons: See below.
XXXXXXXXXX 2009-034174 A. Seidel, CMA (613) 957-2058 June 28, 2010
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
This is in reply to your September 21, 2009 letter in which you requested confirmation that XXXXXXXXXX (the "Corporation") is not required to file federal or Ontario corporate tax returns in the situation described below. We acknowledge receipt of the additional information provided on January 15, 2010.
Background
1. The Corporation is a non-resident of Canada for purposes of the Income Tax Act (the "Act").
2. The Corporation is extra-provincially registered in Ontario pursuant to the Extra-Provincial Corporations Act. The Corporation is required to register extra-provincially because it is the general partner of a limited partnership (the "Partnership"). The Partnership is extra-provincially registered in Ontario under the Limited Partnerships Act so that interests in the Partnership can be sold to investors resident in Ontario.
3. Neither the Corporation nor the Partnership carries on any business in Canada. Neither the Corporation nor the Partnership has ever had a permanent establishment in Canada, has ever owned any real property, timber resource property or a timber limit in Canada, has never disposed of taxable Canadian property or has ever owned or controlled any other property in Canada.
Ontario Income Tax
Pursuant to subsection 75(1) of the Ontario Corporations Tax Act (the "CTA"), a non-resident corporation is required to file a tax return in Ontario if it is liable to tax under the CTA. Prior to January 1, 2009, a non-resident corporation was liable to tax if, pursuant to section 2(2) of the CTA, at any time in the taxation year or in a previous taxation year:
- the corporation had a permanent establishment ("PE") in Ontario;
- the corporation owned real property, timber resource property or a timber limit in Ontario and the corporation's income from the property or timber limit arose from the sale or rental of the property or timber limit or is a royalty or timber royalty; or
- the corporation disposed of property that would be taxable Canadian property, within the meaning thereof in subsection 248(1) of the Act that is deemed to be situated in Ontario.
Under subsection 4(1) of the CTA, a PE includes branches, mines, oil wells, farms, timberlands, factories, workshops, offices, agencies and other fixed places of business. In addition, a PE of a corporation is deemed to exist under subsection 4(2) of the CTA if the corporation carries on business through an employee or agent who has general authority to contract for the corporation or who has a stock of merchandise owned by the corporation from which the employee or agent regularly fills orders which the employee or agent receives. Pursuant to subsection 4(3) of the CTA, a corporation that has business dealings through a commission agent, broker or other independent agent shall not of itself mean that the corporation is deemed to have a PE.
The sale of interests in the Partnership, in and of itself, is not considered to be a business carried on in Ontario for purposes of deeming a PE to exist under the CTA.
Ontario Taxation Act
For taxation years ending after December 31, 2008, the Taxation Act, 2007 (the "TA") will apply instead of the CTA. Subsection 27(1) of the TA provides that every corporation that has a PE in Ontario at any time in a taxation year is liable for the Ontario corporate taxes imposed under the TA. For this purpose, the meaning assigned by subsection 400(2) of the federal Income Tax Regulations applies. Generally, a PE is a fixed place of business, which includes, among other things, an office, a branch or a warehouse. It is a question of fact whether a particular corporation has a PE in a particular province. For a detailed discussion on what constitutes a PE, you may wish to refer to Interpretation Bulletin IT-177R2, "Permanent Establishment of a Corporation in a Province". It is our view that the sale of interests in the Partnership, in and of itself, would not give rise to a PE.
Federal Income Tax
Pursuant to subsection 150(1) of the Act, a non-resident corporation is required to file a federal income tax return where, at any time in a taxation year, the corporation carries on business in Canada, has a taxable capital gain, disposes of certain taxable Canadian property or is liable to tax under Part I of the Act. The sale of interests in the Partnership in Canada, in and of itself, would not be considered to be a business carried on in Canada.
Conclusion
The Corporation would not be required to file an Ontario corporate tax return or a federal tax return solely as a result of the Corporation's sale of interests in the Partnership to investors resident in Ontario.
We trust the above comments address your concerns.
Yours truly,
Daryl Boychuk
Manager, International Tax Section I
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch