5.2.1[a] Taxation of Income of Non-Residents Generally
A non-resident person is subject to Part I tax in Canada if the non-resident, at any time in a taxation year,
1 – Was employed in Canada.
2 – Carried on a business in Canada.
3 – Disposed of a taxable Canadian property.
A non-resident may also be subject to tax in Canada under Part XIII of the Act when it has received from a person resident in Canada certain passive income, such as interest, dividends, royalties, management fees or distributions from Canadian trusts or estates.
In respect of a non-resident’s income arising from the non-resident’s business activities in Canada, the general effect of subsection 115(1), in conjunction with the deductions provided for treaty-protected income, is to include in the computation of the taxable income earned in Canada only the net income and losses from the non-resident’s businesses carried on in Canada, to the extent that such income is not treaty-protected.
A non-resident corporation carrying on a business in Canada through a branch is also liable to an additional branch profits tax imposed at the rate of 25 per cent on the amount of the corporation’s taxable income earned in Canada for the year and not reinvested in Canadian property.
5.2.1 [b] Carrying on Business in Canada
Generally, the threshold for carrying on business in Canada is very low and a non-resident is likely to be found to be subject to tax in Canada on the income from its business activities in or with Canada, even if such activities are limited and have a minimal economic connection with Canada. Consequently, a U.S. resident carrying on business activities in Canada has to rely on relief on relief in Articles V and VII of the Treaty in order to limit its income tax liability in respect of its income from a business carried on in Canada.
What constitutes a Business?
The activities of the non-resident person should constitute a business. The term “business” is defined broadly in the Act to include a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade but excluding an office or employment.
Under Canadian law, every activity undertaken by a person in pursuit of profit is considered to be business. Under Canadian law, “the characterization of income as income from a business or income from property must be made from an examination of the taxpayer’s whole course of conduct viewed in the light of surrounding circumstances.
Generally, the active engagement by a taxpayer in the business whose sources of revenue such as interest or rentals are property is indicative of the income being from business rather than property.
The business should involve the continuity of time or permanency of operations, with the result that an isolated transaction undertaken by a non-resident may alone be insufficient to constitute carrying on a business in Canada.
The determination of whether a particular person carries on business in Canada is, under common law, a question of fact. There are two main tests used by the courts and the CRA in order to determine if a particular business has sufficient nexus with Canada: 1 – the location of contract and 2 – the location of profit – generating activities.
Pursuant to the CRA administrative position, the following types of businesses are viewed as being carried in the particular places:
CRA Administrative Position:
The following factors as articulated in Canadian and British jurisprudence have been summarized and applied by CRA as relevant for determining whether a particular taxpayer carries on business in Canada:
1 – Where the contract which is the basis of the transaction is made;
2 - Where the goods are delivered or payments are made;
3 – Where the business assets are located;
4 – Where an agent or independent contractor is utilized;
5 – Where the operations take place from which the profits in substance arise (as opposed to where profits are realized);
6 – The nature of the activities / transactions;
7 – The establishment of a bank account, listed telephone number or address;
8 – Whether the reason for compliance with a jurisdiction’s rules and relations is business – or legally – motivated;
9 – Whether the taxpayer intended to do business in Canada;
10 – Place where the assets used in the business are purchased;
11 – The degree of supervisory or other activity in Canada;
12 – The substance or object of the transaction;
13 – The presence of a representative or resident expert;
14 – Whether activities in Canada are merely ancillary to the main business;
15 – Whether individuals in Canada assist the taxpayer in his endeavor;
16 – The reason for the taxpayer’s existence; and
17 – How ‘the reasonable man’ would answer the question.
A non-resident would be considered to carry on a business in Canada if the non-resident is engaged in any of the following activities:
1 – Producing, growing, mining, creating, manufacturing, fabricating, improving, packing, preserving, or constructing, in whole or in part, anything in Canada whether or not the non-resident exports that thing without selling it before exportation;
2 – Soliciting orders or offering anything for sale in Canada through an agent or servant, whether the contract or transaction is to be completed inside or outside Canada or partly in and partly outside Canada; or
3 – Disposing Canadian resources property, timber resource property, or real property (other than capital property) situated in Canada, including an interest therein or option in respect thereof, whether or not the property is in existence.
5.2.1 [c] Investment and other Financial Activities in Canada
Pursuant to the Act, a non-resident is not considered to be carrying on business in Canada at any particular time solely because of the provision to the non-resident of designated investment services by a Canadian service provider. For the purposes of this deeming provision, the term ‘Canadian service provider” is defined to mean any corporation or trust resident in Canada or a Canadian partnership. The term ‘designated investment services’ is a defined term that includes investment management and advice and purchasing and selling certain publicly traded securities and other qualified investments by a Canadian service provider.
5.2.1 [d] Dispositions of Taxable Canadian Property
Pursuant to the extended meaning of ‘carrying on business in Canada’ certain dispositions of taxable Canadian properties are deemed to constitute carrying on business in Canada. In particular, the disposition of:
1 – Canadian resource property;
2 – A timber resource property;
3 – Real property situated in Canada is deemed to constitute carrying on a business in Canada.
5.2.1 [e] Carrying on Business through an Agent
For the purposes of the Act, where an agent acts on behalf of a non-resident principal in the course of the principal’s business, the agent’s activities in Canada are attributed to the non-resident principal, with the result that the principal may be found to be carrying on a business in Canada.
5.2.1 [f] Foreign Parents with Canadian Subsidiaries and Canadian Branches
Under Canadian law, a corporation has a legal personality and existence of its own, distinct from its shareholders. Absent the agency relations between a corporate parent and its subsidiary, the subsidiary’s business should not be attributed to its corporate parent. Further, a mere ownership by the corporate parent of all the share of the subsidiary generally should not impute the subsidiary’s activities or business to its parent, nor should ‘complete and detailed domination’ by the parent of the subsidiary’s business suffice to make the subsidiary an agent for the parent.
5.2.1 [g] Taxation of Foreign and Canadian Partnerships with Foreign Partners
If a partnership carries on business in Canada each and every partner, including non-resident partners, would be considered to be carrying on that business in Canada, with the result that each non-resident partner will be liable for Canadian tax in respect of that business in Canada.
Any person receiving an allocation of a partnership income, such as a former or retired partner, will be deemed to have been a member of the particular partnership and to have carried on a business in Canada.
5.2.1 [h] Electronic Commerce
There are no special rules in Canadian income tax law dealing with carrying on business by means of electronic commerce. The general principles above should be applied to the determination of whether particular e-commerce activities would amount to carrying on a business in Canada.
Advisor’s Guide to Canada – U.S. Tax Treaty
By: Vitaly Timokhov, Raymond Montero, David Kerzner
Published by: Thomson Carswell
The Accounting and Tax