| 24(1) | 5-9253 |
| M.P. Sarazin | |
| (613) 957-2125 |
Attention: 19(1)
August 17, 1990
Dear Sirs:
Re: Part I and Part XIII of the Income Tax Act (Canada) (the "Act")
This is in reply to your letter dated December 8, 1989 wherein you requested a technical interpretation regarding the potential liability for income tax under both Part I and Part XIII of the Act with respect to the following hypothetical situation. We apologize for a the delay in responding to your request.
1. Corporation A (A Co) is not resident in Canada.
2. A Co carries on a business in Canada consisting of the rental of real property in Canada.
3. A Co does not have a permanent establishment in Canada within the meaning of subsection 400(2) of the Income Tax Regulations (the "Regulations").
In your view the provisions of subsection 2(3) of the Act would apply to the taxable income earned by A Co in Canada for the year determined in accordance with Division D of the Act. At the same time, the provisions of paragraph 212(1)(d) of the Act would apply to the rental income thus subjecting the income to tax under Part XIII of the Act. Since A Co does not have a permanent establishment in Canada, the provisions of paragraph 805(1)(a) of the Regulations would not apply to exempt the rental income form Part XIII tax therefore subjecting A Co to tax under both Part I and Part XIII of the Act.
We would like to draw your attention to paragraph 7 of Interpretation Bulletin No. IT-177R2 "Permanent Establishment of a Corporation in a Province and of a Foreign Enterprise in Canada", as amended by the Special Release thereto dated June 7, 1985, wherein it states:
"It is, a question of fact whether a rental operation constitutes the carrying on of a business in Canada or whether rents received constitute income from property. Generally, however, subject to the comments in 10 of IT-420R, rental income of a corporation will be considered to constitute income from a business and the corporation will therefore have a permanent establishment in respect thereof. Where the rental income is derived from real estate, such a corporation will have a permanent establishment wherever the rental properties are located, ..."
Since, in the Department's view, A Co would have a permanent establishment in Canada, paragraph 805(1)(a) of the Regulations would apply to exempt the rental income from Part XIII tax.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 24 of Information Circular 70-6R dated December 18, 1978, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.
We trust you will find the foregoing satisfactory.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch