903078
Dear Sirs:
This is in reply to your letter dated October 30, 1990 in which you asked us to confirm your interpretation of "active business" as contained in section 248 of the Income Tax Act (the "Act") and how the meaning of "active business" applies to the manufacturing and processing profits deduction ("M&P Deduction") as contained in section 125.1 of the Act for a non-resident corporation carrying on qualified manufacturing and processing activities in Canada through a branch.
Your Interpretation
The definition of "active business" as found in section 248 of the Act is only with respect to a taxpayer resident in Canada. For a taxpayer not resident in Canada, the ordinary meaning of an active business would apply and it means any business carried on by the taxpayer. Therefore, a non-resident can carry on an active business as used in the definition of Canadian manufacturing and processing profits and as such, since the provisions of section 125.1 of the Act apply to any corporation whether or not a resident of Canada, a Canadian branch of a non-resident corporation would be eligible for the reduced tax incentive for manufacturing and processing activities carried on by it in Canada.
Our Comments
We confirm your interpretation that the meaning of "active business" as contained in section 248 of the Act is only with respect to a taxpayer resident in Canada and for a taxpayer not resident in Canada, the ordinary meaning of "active business" would apply. The Webster dictionary has the following meaning for the word "active":
"characterized by action rather than by contemplation or speculation".
The meaning of "business" is defined in subsection 248(1) as follow:
"includes a profession, calling, trade, manufacture or undertaking of any kind whatever and, ......., an adventure or concern in the nature of trade ....."
Therefore, a broad meaning of "active business" is an adventure or concern in the nature of trade that is not for speculative purposes. In addition, the term "adjusted business income" for purposes of the M&P Deduction as defined in section 5202 of the Income Tax Regulations is discussed in paragraphs 14 and 15 of Interpretation Bulletin IT-145R. Paragraph 15 of IT-145R notes that most problems related to the calculation of adjusted business income revolve around what constitutes active business income and makes reference to IT-73R3 which sets out guidelines for resolving this issue. Although IT-73R3 was issued for the purposes of the small business deduction, the comments in it are equally applicable to section 125.1 of the Act. Accordingly not all business carried on in Canada by a non-resident corporation meets the meaning of active business.
However, we agree with you that a non-resident corporation performing qualified manufacturing and processing activities in Canada through a Canadian branch is eligible for the M&P deduction under section 125.1 of the Act provided that the non-resident carries on a business in Canada and the business is an active business.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular IC70-6R2, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch