Among the requirements in para. (c) of the definition of “excluded entity” in s. 18.2 is that “all or substantially all of the businesses … and undertakings and activities of the taxpayer are … carried on in Canada.”
Assume that B Co (a Canadian subsidiary of a Canadian parent) generates substantially all of its revenue from sales to U.S. customers through Canadian employees, who travel to the U.S., and that, although it stores its goods in the U.S. for sale to U.S. customers, it otherwise has no physical presence in the U.S. and no permanent establishment there. In this scenario – where Canada maintains full ability to tax – are the businesses, undertakings and activities of B Co carried on in Canada?
CRA indicated that the relevant test is not whether Canada has relinquished its right to tax, but rather a two-part factual test: where does the entity carry on business; and if it carries on business both inside and outside Canada, are all or substantially all of its business activities and undertakings within Canada? CRA further noted that the meaning of “substantially all” has both qualitative and quantitative components and that neither CRA nor the courts have ever considered 90% to be a strict threshold for “substantially all.”