Principal Issues: Whether a post-secondary educational institution is considered to be carrying on business such that the employment income of an employee of that institution is exempt from taxation on that income within Canada pursuant to clause 115(2)(e)(i)(B).
Position: Question of Fact.
Reasons: The determination will depend on the function of the employee and the activities that the institution carries out.
July 12, 2007
Internation Tax Directorate HEADQUARTERS Client Services Division Income Tax Rulings Directorate Attention: Jeffrey Haynes Shelley Lewis (613) 957-2118
2007-023796
Post Secondary Educational Institutions and clause 115(2)(e)(i)(B)
This is in response to your correspondence of May 28, 2007, requesting our views as to whether the amount of the non-resident taxpayer's (the "Taxpayer") employment income from a post secondary educational institution in XXXXXXXXXX should be excluded from taxation within Canada pursuant to clause 115(2)(e)(i)(B) of the Income Tax Act (the "Act"). This letter also reflects our subsequent telephone conversations (Haynes/Lewis).
The facts provided in your request can be summarized as follows:
The Taxpayer, a former resident of Canada, is employed by the XXXXXXXXXX (the "Employer") and performs employment services in XXXXXXXXX. The Employer is a corporation created under XXXXXXXXXX and is resident of Canada for income tax purposes and subject to payroll withholdings and remissions for tax, CPP, and EI deductions.
It is our further understanding that the Employer entered into a comprehensive agreement with the XXXXXXXXXX government to set up and run a post-secondary educational institution (the "School"). The School charges tuition to the students and the students' payments are used in operating the School.
Our Comments
The Taxpayer's income from the Employer would not be included in his income under subsection 115(2) of the Act by virtue of the exception if the conditions described in clause 115(2)(e)(i)(B) Act are satisfied.
In particular, it is necessary to determine whether the amount in question is paid to the Taxpayer in connection with the rendering of services for the Employer in the ordinary course of business. The expression "carried on business" is not defined in the Act. In this regard, we would refer you to the Federal Court of Appeal's decision in John F. Timmins v. Her Majesty the Queen (99 DTC 5494). The decision deals with the application of section 122.3 of the Act and it provides insights regarding the interpretation of the expressions "carry on business", "carrying on business" and "carried on business" for the purposes of the Act. Based on this decision, we have accepted that, where an entity's overall purpose is not for profit (as in the case of a University), the entity may still carry out certain activities which can be said to be business activities. If these activities are carried out regularly over a period of time, then we may accept that the entity carries on business with respect to those activities. Consequently, in situations where some of the activities carried out by the Employer are considered to be business activities while other activities are not, we will accept that the Employer carries on business with respect to the former type of activities. You will have to determine whether the Employer carries on business based on the nature and the types of the activities that it carries out (i.e., on the activity level), not on the overall purpose of the Employer (i.e., not on the entity level).
With respect to this particular Employer we do not have enough information to determine what, if any of its activities may constitute a business. Nor do we have any information on what services the Taxpayer provides. However, it is generally our view that employment services that were provided in respect of the educational services of a college or university would not constitute a business.
We trust that these comments will be of assistance.
Olli Laurikainen
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch