Dear Sirs:
Re: International Shipping Corporations and Regulations 5906 and 5907
This is in reply to your letter dated August 2, 1991 in respect of the above-noted matter.
You have asked for our views as to where the earnings of a non-resident corporation attributable to a permanent establishment situated in Canada will be attributed under Regulations 5906 and 5907 if such earnings are exempt from tax in Canada by virtue of paragraph 81(1)(c) of the Act.
Our Comments
Notwithstanding that a foreign affiliate carries on its business through a permanent establishment situated in Canada, by virtue of Regulation 5906(1)(b), none of the income that is exempt fromCanadian tax under paragraph 81(1)(c) shall be attributable to a Canadian permanent establishment for purposes of Part LIX of the Regulations. If the foreign affiliate has a permanent establishment in respect of its international shipping business in the country in which it is resident, its income (that is exempt from Canadian tax) that would be attributable to its permanent establishment in Canada (but for Regulation 5906(1)(b)) shall, by virtue of Regulation 5907(1)(a), be deemed to be attributed to the permanent establishment in the country in which it is resident. If the foreign affiliate has no permanent establishment in respect of its international shipping business in the country in which it is resident, the income (that is exempt from Canadian tax) that would have been attributable to its permanent establishment in Canada (but for Regulation 5906(1)(b)) shall not be attributed to any country and will not be included in exempt or taxable earnings
It is essentially a question of fact, having regard to the definition in the applicable income tax convention or, if there is no applicable convention, Regulation 400(2), as to whether a corporation has a permanent establishment in respect of its international shipping business in the country in which it is resident. Having regard to the requirement that the permanent establishment be in respect of its international shipping business, i.e. that some part of the international shipping business in respect of which the corporation is entitled to exemption from Canadian tax under paragraph 81(1)(c) of the Act be carried on in the country in which the corporation is resident, the mere maintenance of a registered office (utilizing a local firm of lawyers or accountants) would likely not, in and by itself, constitute a permanent establishment in respect of the corporation's international shipping business.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
c.c. D. McFadyen Department of Finance