ARCHIVED - Additional Tax on Certain Corporations Carrying on Business in Canada

From: Canada Revenue Agency

What the "Archived Content" notice means for interpretation bulletins

NO: IT-137R3SR

DATE: February 26, 1996

SUBJECT: INCOME TAX ACT
Additional Tax on Certain Corporations Carrying on Business in Canada

REFERENCE: SPECIAL RELEASE

Application This Special Release revises Interpretation Bulletin IT-137R3 dated January 31, 1990 and cancels Interpretation Bulletin IT-277R, Branch Tax - Effect of Tax Treaties, dated October 8, 1986. See 4 below for a discussion on the effect of tax treaties.

Note: The Special Release does not deal with the proposed amendments to sections 219 and 219.1 announced by the Minister of Finance on April 26, 1995. Generally, the amendments to section 219 would apply to taxation years that begin after 1995 and those for section 219.1 to the 1996 and subsequent taxation years.

Bulletin Revisions

1. Paragraph 1 of the bulletin is revised to take into consideration the repeal of section 88.1 and the enactment of subsections 128.1(4) and 250(5.1) under S.C. 1994, c.21 (formerly Bill C-27) generally applicable after 1992. Section 88.1, generally applicable prior to 1993, provided results similar to the interaction of subsections 128.1(4), 250(5) and 250(5.1) described in paragraph 1 of the bulletin which now reads as follows:

1. While section 219 is commonly thought of as imposing a tax on the branch operations in Canada of a non-resident corporation, it is not restricted in its application to branch operations or to non-resident corporations. Section 219 applies to every corporation that is not, throughout a taxation year, a Canadian corporation as defined in subsection 89(1) and thus applies to any corporation carrying on business in Canada in a particular taxation year that was not incorporated in Canada, and

(a) was not, throughout the taxation year, resident in Canada, or

(b) was, throughout the taxation year, resident in Canada but was not resident in Canada continuously since June 18, 1971.

A corporation incorporated in Canada is not subject to section 219 unless it ceases to be a resident in Canada. Such a change of residential status will occur if

(c) mind, management and control of the corporation are outside Canada and subsection 250(5.1) applies as a result of the corporation being continued outside Canada, or

(d) the corporation is deemed to be a non-resident of Canada by subsection 250(5) as a result of the corporation becoming resident in a country with which Canada has a tax treaty in force and of it being established that the corporation will be treated as a resident of that country for the purpose of the tax treaty.

Where this is the case, section 219 may begin to apply starting with the taxation year deemed by subparagraph 128.1(4)(a)(i) to have begun at the time the corporation ceased to be resident in Canada.

As a result of the above, subsections 128.1(4), 250(5) and 250(5.1) are added to, and section 88.1 is deleted from, the reference area of the bulletin.

2. Paragraph 2 of the bulletin is revised to reflect the repeal of section 88.1, the introduction of subsection 128.1(4) and amendments to section 219.1 enacted under S.C. 1994, c.21 generally applicable after 1992. Section 88.1, generally applicable prior to 1993, produced a similar result to that described in the first sentence of the revision to paragraph 2. Paragraph 2 of the bulletin now reads as follows:

2. A corporation that ceases to be a Canadian corporation by ceasing to be a resident in Canada is subject to tax under section 219.1 for the taxation year that is deemed by subparagraph 128.1(4)(a)(i) to have ended immediately before the time the corporation ceased to be resident in Canada. The tax is 25 percent (see 3 below) of the amount by which the fair market value of its properties at the time it ceased to be a Canadian corporation exceeds the total, at that time, of its paid-up capital and its liabilities, other than its liability to pay dividends and the tax payable under section 219.1. Section 219.1 will also apply to a corporation that has continued outside of Canada and ceased to be a Canadian corporation.

3. Paragraph 3 of the bulletin is revised to reflect amendments to section 219.2 and the enactment of section 219.3 under S.C. 1994, c.21 applicable to the 1985 and subsequent taxation years. Paragraph 3 of the bulletin now reads as follows:

3. The standard rate of tax imposed by section 219 is 25 percent. The imposition of tax under section 219 is subject to any overriding provision in a bilateral income tax treaty that may exempt or partly exempt a corporation from, or limit the rate of, this tax (see 4.1 to 4.3 below). Section 219.2 provides that where a corporation is resident in a country with which Canada has an income tax treaty that

(a) does not limit the rate of additional tax on corporations resident in that country, but

(b) the treaty limits the rate of tax imposed on dividends paid by a corporation resident in Canada to a corporation resident of that country,

the rate of tax imposed under section 219 in any taxation year in which the treaty applied on the last day of that taxation year shall be the rate of Canadian non-resident withholding tax applicable under that treaty to dividends paid by a corporation resident in Canada to a corporation resident in that country that owns all the shares of the corporation resident in Canada (the "reduced rate").

Where (b) above applies to a corporation on the first day after it ceases to be a Canadian corporation, section 219.3 provides that the reduced rate replaces the 25% rate in section 219.1. For taxation years that end after June 1993, section 219.3 only applies where it cannot reasonably be considered that one of the main reasons for the corporation becoming resident in the other country was to reduce the amount of tax payable under Part XIII or XIV.

4. The following new paragraphs 4.1, 4.2 and 4.3 of the bulletin replace paragraphs 2, 3 and 4, respectively, of cancelled Interpretation Bulletin IT-277R, Branch Tax - Effect of Tax Treaties:

Effect of Tax Treaties

4.1. Each of Canada's tax treaties contains a provision to exempt corporations resident in the other country from Canadian tax on business profits unless such profits are attributable to a business carried on through a permanent establishment in Canada. This exemption applies to both the normal income tax and to the branch tax under section 219 on business profits of corporations. The current version of IT-177, Permanent Establishment of a Corporation in a Province and of a Foreign Enterprise in Canada, outlines the general principles used in determining whether or not a corporation has a permanent establishment in Canada. However, since the definition of the term "permanent establishment" may vary between treaties, reference should also be made to the relevant treaty in making a determination in any specific case.

4.2. Most of the existing tax treaties contain articles limiting the rate of branch tax under section 219. Examples of tax treaties containing such an article are the treaties with the United States of America, the United Kingdom of Great Britain and Northern Ireland and Mexico. See 3 above where a corporation is resident in a country with which Canada has an income tax treaty that does not limit the rate of additional tax on corporations resident in that country.

4.3. Reference should be made not only to the treaties existing at the date of this publication but to any new treaties or protocols modifying existing treaties which come into force subsequent to the date of this bulletin, since such treaties may contain provisions that affect a corporation's liability for tax purposes under section 219 of corporations carrying on business in Canada.

5. Paragraph 5(iii) of the bulletin is revised to reflect the amendment to paragraph 219(1)(a.3) enacted under S.C. 1994, c.7 (formerly Bill C-15) applicable after December 20, 1991. Paragraph 5(iii) of the bulletin now reads as follows:

(iii) amount deducted as a resource allowance (other than by reason of being a member of a partnership) in computing taxable income earned in Canada for the taxation year

6. Paragraph 5(vii) of the bulletin is revised to reflect the amendment to paragraph 219(1)(e) enacted under S.C. 1994, c.7 applicable to taxation years ending after June 1989. Paragraph 5(vii) of the bulletin now reads as follows:

(vii) the total of the taxes payable under Parts I, I.3 and VI for the taxation year less the portion of the tax payable under Part 1 attributable to net taxable capital gains specified in (vi) above

7. Paragraphs 5(vi) to 5(xi) of the bulletin list the amounts that may be deducted in computing the amount on which a non-resident corporation's branch tax liability is based. Paragraph 5(viii.1) is added to the bulletin to take into consideration the enactment of paragraph 219(1)(f.1) under S.C. 1994, c.7 applicable to interest and penalties paid in the 1988 and subsequent taxation years. New paragraph 5(viii.1) of the bulletin reads as follows:

(viii.1) non-deductible interest or penalties paid in the taxation year in respect of federal or provincial income taxes

8. For the same reason given in 5 above, paragraph 6(iii) of the bulletin is revised to read as follows:

(iii) amount deducted as a resource allowance (other than by reason of being a member of a partnership) in computing taxable income for the taxation year

9. For the same reason given in 6 above, paragraph 6(vii) of the bulletin is revised to read as follows:

(vii) the total of the taxes payable under Parts I, I.3 and VI for the taxation year

10. For the same reason given in 7 above, paragraph 6(viii.1) is added to the bulletin to complete the list in paragraphs 6(vii) to 6(xiv) of the amounts that may be deducted in computing the amount on which a resident corporation's branch tax liability is based. New paragraph 6(viii.1) of the bulletin reads as follows:

(viii.1) non-deductible interest or penalties paid in the taxation year in respect of federal or provincial income taxes

11. Paragraph 16 of the bulletin is revised to take into consideration the amendment made to subsection 808(3) of the Regulations by P.C. 1993-1548, SOR 93-395 applicable to taxation years ending after August 11, 1993. Paragraph 16 of the bulletin now reads as follows:

16. Qualified investment in property in Canada includes certain liquid assets as defined in subsection 808(3) of the Regulations for a corporation and in subsection 808(6) of the Regulations for a partnership. The specified liquid assets for a corporation with a taxation year ending after August 11, 1993 must either have been generated by a business carried on by the corporation in Canada, or used or held by the corporation in the course of carrying on a business in Canada. The specified liquid assets that qualify for a corporation with a taxation year ending before August 12, 1993 or for a partnership need not be identified with the business carried on in Canada. An amount deposited with a bank or other recognized financial institution, denominated in either Canadian or a foreign currency, may qualify only if the deposit is with a branch or other office in Canada of that institution. Other deposits or prepaid expenses do not qualify as allowable liquid assets or otherwise as an investment in property.

If you have any comments regarding the matters discussed in this Special Release, please send them to:

Director, Technical Publications Division
Policy and Legislation Branch
Revenue Canada
875 Heron Road
Ottawa ON K1A 0L8



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