| 19(1) | File No. 5-7500 |
| R.C. O'Byrne | |
| (613) 957-2126 |
July 21, 1989
Re: Carrying on business in Canada
This is in reply to your letter of February 1, 1989 in which you asked us two questions about the following hypothetical situations:
1. A person resident in Hong Kong (and not a resident of Canada) intends to purchase real estate situated in Canada from a Canadian resident. The purchase of the real estate will take place in Hong Kong. The real estate holdings of the Hong Kong resident will constitute inventory. The Hong Kong resident has no ties to Canada, has never conducted any business or other activity in Canada, and has no Canadian bank accounts.
2. The real estate inventory will subsequently be sold in Hong Kong to persons living in Hong Kong, with no units offered for sale in Canada. The purpose of selling the properties exclusively in Hong Kong is to take advantage of a strong market where the real estate can be sold more easily and at higher prices.
Our response to your questions is set out below.
1. If the above situation is a business activity, would the Hong Kong resident be carrying a business in Canada?
Whether or not a non-resident is carrying on business in Canada or has a permanent establishment in Canada is a question of fact.
We do not normally provide opinions or rulings on question of fact because all the facts are not available until the situation actually occurs. Our District Officers are in better position to gather all the facts and are therefore more capable of dealing with these issues. Notwithstanding the above, based on the limited information you have provided us with and provided the activity is a business, it is our view that the Hong Kong resident could very well be considered to be carrying on business in Canada in this situation because the assets (the real estate) which are all the business inventory are located in Canada and remain in Canada at all times. Consequently, the provisions of paragraph 2(3)(b) of the Income Tax Act ("the Act") would apply to this person.
2. If the Hong Kong resident is considered to be carrying on business in Canada how will the business income be allocated between Canada and Hong Kong?
In our opinion the income earned from the sale of the Canadian real estate by the Hong Kong resident in this situation would be attributable to the increase in the value of the inventory which is situated in Canada. The determination of the amount to be allocated to Hong Kong in this situation is a question of fact. One possibility is to allocate a portion of the net income equal to a reasonable mark-up on the cost of the services performed in Hong Kong if the persons providing such services are not already receiving fair market value renumeration for these services.
We trust this will be of assistance to you.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch