Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether a permanent establishment exists in a province in offices of related company.
Position: In this case a PE does exist in a province where the business activities of the corporation are carried out in the offices of a related company.
Reasons: The offices of the related company represent the fixed place of business of the corporation. Alternatively those offices may be viewed as the principal place in which the corporation's business is conducted for the purposes of paragraph 400(2)(b) of the Regulations or the employees of the related company may be viewed as agents with general authority to contract for the purposes of paragraph 400(2)(c) of the Regulations.
February 16, 1999
XXXXXXXXXX Tax Services Office Income Tax Rulings and
XXXXXXXXXX Interpretations Directorate
Olli Laurikainen
Attention: XXXXXXXXXX (613) 957-2116
983285
XXXXXXXXXX
This is in response to your memorandum dated December 9, 1998 wherein you request us to reconsider our technical interpretation dated September 8, 1998 that XXXXXXXXXX carries on an investment business through a permanent establishment in the province of XXXXXXXXXX .
You indicate that the estimates submitted earlier regarding the amount of time spent by the employees of a related company performing functions on behalf of XXXXXXXXXX were overstated. You request our view whether your reduced time estimates would have lead to a different conclusion on our part.
A brief description of the facts is as follows.
1. XXXXXXXXXX is a XXXXXXXXXX based holding company.
2. XXXXXXXXXX owns all the common shares of a Canadian corporation, XXXXXXXXXX
3. XXXXXXXXXX owns all the outstanding shares of XXXXXXXXXX XXXXXXXXXX is a corporation incorporated in XXXXXXXXXX on XXXXXXXXXX .
4. The permanent location of the corporate records and registered office of XXXXXXXXXX was resolved by the directors to be XXXXXXXXXX .
5. XXXXXXXXXX holds all of the outstanding shares of XXXXXXXXXX a corporation resident and carrying on an active business in the XXXXXXXXXX .
6. XXXXXXXXXX earns substantial dividend income from XXXXXXXXXX (e.g. $XXXXXXXXXX in XXXXXXXXXX ). It also earns substantial interest income (e.g. $XXXXXXXXXX in XXXXXXXXXX ) from the investment of such dividends.
7. XXXXXXXXXX has filed its corporate returns on the basis that its income is business income and that it is allocated exclusively to the province of XXXXXXXXXX .
8. The activities of XXXXXXXXXX can be summarized as the collection of dividend income, investment thereof in short-term interest bearing investments, and payment of dividends to its parent company. The short-term investment portfolio managed by the employees of XXXXXXXXXX in XXXXXXXXXX during the relevant period (XXXXXXXXXX ) ranged from $XXXXXXXXXX to $XXXXXXXXXX .
9. The activities of XXXXXXXXXX were conducted substantially all by employees of XXXXXXXXXX except that accounting work and financial statement preparation had been contracted to XXXXXXXXXX office of XXXXXXXXXX . However, the contracting of this accounting function to a firm of Chartered Accountants, in and by itself, does not give rise to a permanent establishment of XXXXXXXXXX in XXXXXXXXXX .
10. Our earlier opinion was based on the estimate that XXXXXXXXXX treasury staff spent approximately XXXXXXXXXX % of their time managing XXXXXXXXXX substantial investment portfolio. These activities involved XXXXXXXXXX utilizing the services of brokerage firms and banks located in XXXXXXXXXX . In addition, we had been advised that XXXXXXXXXX administrative staff were involved XXXXXXXXXX % of their time in the co-ordination and management of XXXXXXXXXX affairs.
Pursuant to an audit review of the activities of XXXXXXXXXX employees, you have now reduced time estimates to the following. XXXXXXXXXX billings and treasury staff supervisor spends the equivalent of XXXXXXXXXX person days per year or roughly XXXXXXXXXX % of his time handling and managing XXXXXXXXXX substantial investment portfolio. XXXXXXXXXX administrative staff in aggregate spend the equivalent of XXXXXXXXXX person days per year in the co-ordination and management of XXXXXXXXXX affairs. The taxpayer's representatives at our meeting XXXXXXXXXX indicated that these estimates were still too high. However, we observe that they appear to be supported by the summary prepared by XXXXXXXXXX of your meetings with XXXXXXXXXX staff. In any case, we note that while the investment policy may have been set out by XXXXXXXXXX , all the activities required to carry out that policy were carried out by employees of XXXXXXXXXX .
You request our view whether these revisions to the time estimates have any impact on the opinions expressed in our September 8, 1998 memorandum with regard to whether XXXXXXXXXX income was income from business and whether XXXXXXXXXX had a permanent establishment at the offices of XXXXXXXXXX in XXXXXXXXXX .
Our Comments
The reduced estimates of time spent by XXXXXXXXXX employees investing the funds of XXXXXXXXXX would not change the conclusions we conveyed to you in our memorandum dated September 8, 1998. We are not aware of any jurisprudence on issue of whether an investment activity conducted by a corporation produces income from a business or income from property that is more clearly on point with the present case than Marconi v. Her Majesty the Queen (S.C.C) 86 DTC 6526 ("Marconi"). In this case, as in Marconi, the funds are invested in short-term interest bearing securities while waiting for a time when the funds would be used for another purpose. In Marconi that other purpose was the purchase of another business, here the other purpose is the payment of dividends. In both cases the funds invested were considerable and the income earned from them was significant. In each case considerable energy and effort was expended in order to obtain the maximum return on investment while staying within the investment guidelines dictated by head office and/or while maintaining the necessary liquidity for when an alternative use for the funds arose. In Marconi about twenty per cent of the working hours of the senior company officer placed in charge of the investments was taken up in day-to-day management of those investments. Here that figure has been estimated to be a little over XXXXXXXXXX %. In Marconi, it was indicated that at any one time there were as many as twelve employees involved in the management of the investments. In Marconi it was observed that the extent of the activity of the staff in managing the investments and their vigilance in earning a maximum return from the funds is evident from the numerous purchases completed each year (201 in 1973, 218 in 1974, 241 in 1975 and 381 in 1976), the variation in the lengths of terms of deposits made and securities purchased according to the trend of market interest rates and the fact that seldom would the staff reinvest the funds realized from a sale in the same instrument.
XXXXXXXXXX
In Marconi the Crown argued that investment by the taxpayer was income from property on the following basis:
(1) the funds were derived from the sale of the broadcasting division and were set aside for the purchase of new capital assets;
(2) the considerable activity involved in purchasing the investments were "a necessary consequence of the need to hold investments in liquid form, in the form of paper that could be quickly converted into cash"; and
(3) few employees were involved and not a great deal of staff time was expended.
These are similar to the arguments presented by the taxpayer in this case. However, the court in Marconi did not accept these arguments. In dealing with the first two arguments the Supreme Court stated that it did not matter why the funds were held by the corporation and it did not matter why the corporation invested in short-term securities. The Supreme Court essentially condensed the issue to the following statement. "The relevant inquiry is whether in fact he is in the investment business".
In dispensing with the argument that there were few employees involved in the investment activity the Supreme Court made the following observations.
The Federal Court of Appeal was also influenced by its finding that few employees were involved in the company's investment activity and not a great deal of staff time was expended. While these are undoubtedly relevant considerations, it is important not to give them inordinate weight. In M.R.T. Investments Ltd. v. The Queen, supra, two of the three corporate taxpayers who were engaged in lending money by way of mortgages on real estate were held to be earning income from a business, despite the fact that the three companies were not paying salaries or rent for office space and despite the fact that they did not even have employees working for them. The presumption which I have discussed above and the day-to-day intervention of the officers and directors of the company in the company's business were enough to characterize the income as business income.
It has also been repeatedly stressed that a large organization is not required for an "adventure or concern in the nature of trade": see, for example, Minister of National Revenue v.Taylor, [1956-60] Ex. C.R. 3, [56 DTC 1125].
In sum we find good support in Marconi for the view that XXXXXXXXXX was carrying on an investment business as opposed to earning income from property despite the reduced estimates of the time spent conducting activities associated with investments in securities.
Other Comments
The taxpayer asserts that in the event we conclude that XXXXXXXXXX activities constitute a business, we should find that such business was carried on substantially all through a permanent establishment in XXXXXXXXXX because this is where the effective management of XXXXXXXXXX is purportedly located. In referring to XXXXXXXXXX we understand that the taxpayer means the offices of XXXXXXXXXX (i.e. XXXXXXXXXX parent company) where the president and assistant secretary of XXXXXXXXXX are stationed, presumably generally performing activities in their capacity as officers of XXXXXXXXXX and not XXXXXXXXXX . As indicated in our earlier memorandum we generally do not accept that a subsidiary will have a permanent establishment in the offices of its parent company solely for the reason that the subsidiary company is managed by the parent company. The business of XXXXXXXXXX in question is the business of investing in short-term investments and in this case the business appears to have been substantially all conducted in the offices of XXXXXXXXXX in XXXXXXXXXX . The XXXXXXXXXX offices were in our view a fixed place of business of XXXXXXXXXX for the purposes of the preamble to subsection 400(2) of the Regulations. We note that even if an argument were raised that the XXXXXXXXXX offices were not a permanent establishment within the meaning set out in the preamble to subsection 400(2) of the Regulations, it would appear that the deeming provisions of either paragraph 400(2)(a) or (b) could deem XXXXXXXXXX to have a permanent establishment in XXXXXXXXXX .
In reference to the argument that XXXXXXXXXX represents an agent with the general authority to contract for the purposes of paragraph 400(2)(b) of the Regulations, at our meeting with XXXXXXXXXX we were advised that XXXXXXXXXX staff have been given such strict investment guidelines in respect of the investment activities that they are to conduct on behalf of XXXXXXXXXX , that these guidelines virtually relieve the XXXXXXXXXX staff of any ability to make independent investment decisions.
XXXXXXXXXX
The general description of XXXXXXXXXX investment activity on behalf of XXXXXXXXXX in the material you have submitted indicate that XXXXXXXXXX had considerable discretion in reference to the investments that could be made so long as such investments were both liquid and low risk and employees of XXXXXXXXXX had the authority to conclude investment purchases without approval from XXXXXXXXXX . General investment parameters dictated by head office would not in our view render XXXXXXXXXX to be something less than an agent with general authority to contract. In summary, the deeming provisions of paragraph 400(2)(b) of the Regulations in our view remain a good secondary argument that XXXXXXXXXX had a permanent establishment in XXXXXXXXXX .
As you may already know, the taxpayer's representatives have indicated that they intend to pursue the matter through the courts should you decide to assess on the basis that XXXXXXXXXX has a permanent establishment in XXXXXXXXXX . The reason for this as we understand it is not due to the differential between the rates of corporate income taxes levied in XXXXXXXXXX as opposed to XXXXXXXXXX but rather because a finding that XXXXXXXXXX has a permanent establishment in XXXXXXXXXX would give rise to a significant XXXXXXXXXX Corporate Capital Tax Liability for XXXXXXXXXX
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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