Printer Friendly

The Canadian Goods and Services Tax and its effect on non-residents of Canada.

On January 1, 1991, the Government of Canada implemented the Goods and Services Tax (GST) - a seven-percent tax on the sale of most goods and services in Canada. The GST, which replaced the federal sales tax in effect since 1924, is designed to treat residents and non-residents of Canada in essentially the same manner, by taxing only goods and services consumed in Canada. This article explores the non-resident's responsibility under the Canadian GST system.

MEANING OF NON-RESIDENT

First, who is a non-resident? The Canadian Excise Tax Act (the Act) defines "non-resident" to mean "not resident in Canada." In the case of an individual,"(1*) residency status is determined according to general legal principles. These principles are the same as a number of those used for purposes of the Canadian Income Tax Act and include such matters as:

* permanence and purpose of stay abroad,

* residential ties with Canada,

* residential ties elsewhere, and

* regularity and length of visits to Canada.

Interpretation Bulletin IT-221R2, Determination of an Individual's Residence Status, has been published by Revenue Canada, Taxation on this subject.(2) The deeming provisions in the Income Tax Act concerning the residency status of individuals, however, do not apply for GST purposes.

Persons(3) other than individuals will be considered residents of Canada under the terms set out in subsection 132(l) of the Excise Tax Act.(4) That subsection deems the following persons to be resident in Canada:

* a corporation - if it is incorporated or continued in

Canada but not elsewhere;

* a partnership, an unincorporated society, a club,

an association, an organization, or a branch of any

of them - if the member, or majority of the members,

which has management and control of the

particular person is resident in Canada at the time;

and

* a labour union - if it is carrying on activities as

such in Canada and has a Iocal union or branch at

that time.

Furthermore, according to general legal principles, a corporation that is not incorporated in Canada but is incorporated elsewhere may still be considered a resident of Canada if the central management and control of the Canadian activities of the corporation are exercised in Canada. The following factors are considered when determining whether a particular person is centrally managed or controlled in Canada (or in another country):

* the place where its directors reside and hold their

meetings;

* the place where its shareholders reside and hold

their meetings;

* the place where its managers reside and hold their

meetings; and

* the place where its principal business and operations

are carried on and where its books are kept.

A trust is generally resident in the country where the trustee, who has management and control of the trust, resides. If more than one trustee has management and control, the trust is resident in the country where the majority of the trustees reside. Moreover, a non-resident person will be deemed to be resident in Canada in respect of particular activities of the non-resident person if the non-resident person has a permanent establishment in Canada.(5)

NON-RESIDENTS AND REGISTRATION

By virtue of subsection 240(l) of the Excise Tax Act, every non-resident person who carries on business in Canada, other than a small supplier, must register for GST purposes if they make taxable supplies in Canada.(6) A small supplier is a person with annual worldwide sales of taxable supplies of 30,000 or less (Canadian dollars).

If the non-resident does, in fact, make taxable supplies in Canada, but because of the small supplier rules is not required to register - or if it is determined that the non-resident is not carrying on business in Canada - then the supplies made in Canada by the non-resident will be deemed to be supplies made outside Canada by virtue of subsection 143(l) of the Act,(7) as long as the other requirements specified in that subsection are met.

Before considering whether a non-resident person is carrying on business in Canada, a determination must be made whether that non-resident is engaged in a business and, also, whether that business is carried on. The definition of "business" for Canadian income tax purposes which is contained in subsection 248(1)(8) and section 253(9) of the Income Tax Act differs from the GST definition found in the Excise Tax Act. Therefore, a non-resident person considered to be carrying on business for Canadian income tax purposes is not necessarily considered to be carrying on business for purposes of the GST. Equally important, where it is determined that a non-resident person is carrying on business in Canada for GST purposes, this in itself does not establish that the non-resident will be considered to be carrying on business in Canada for purposes of the Canadian Income Tax Act.

Consideration should also be given to specific provisions in the Act supplanting any determination whether a particular non-resident person will be considered to be carrying on business in Canada. For instance, subsection 240(2) requires that a person who enters Canada for the purpose of making taxable supplies of admission in respect of a place of amusement, a seminar, an activity, or an event, must register for GST purposes before making such supplies.(10) Therefore, it need not be determined whether such a person is carrying on business in Canada. Similarly, subsection 240(4) deems a non-resident person who in Canada solicits orders to supply prescribed goods, such as magazines, books or periodicals, sent by mail or courier to persons in Canada, to be carrying on business in Canada.(11) As such, the non-resident is required to register and collect GST on any taxable supplies made in Canada if his or her worldwide revenues from taxable supplies exceed the small supplier threshold.

These distinctions and qualifications are important in considering whether a non-resident person is carrying on business in Canada.

CARRYING ON BUSINESS

Subsection 123(l) of the Excise Tax Act defines "business" only by reference to what the term includes:

... a profession, calling, trade, manufacture or undertaking

of any kind whatever, whether the activity

or undertaking is engaged in for profit, and any activity

engaged in on a regular or continuous basis

that involves the supply of property by way of lease,

licence or similar arrangement but does not include

an office or employment.

Accordingly, what constitutes a business for GST purposes is not limited to that specified in subsection 123(l), but also encompasses the commonly accepted meaning of "business." Such a general meaning has been described in the English case of Smith v. Anderson (1880), 15 Ch.d. 247 (per Jessel, MR) at 258, and in the Canadian case of The Queen v. D.C. Matthews (1974) CTC 230, as -

... anything which occupies the time and attention

and labour of a man for the purpose of profit.

As previously noted, the definition in subsection 123(1) of the Act provides that a business can exist "whether the activity or undertaking is engaged in for profit."

The courts have held that, to be carrying on business, the activities in question must be considered to occur on a regular or continuous basis. There are no definitive criteria or threshold to establish how many activities constitute "regular," or how long a period is necessary to be "continuous." Rather, each case must be determined based on its own facts, taking into consideration the history of the non-resident|s activities both within and outside Canada, as well as the non-resident person's intentions.

CARRYING ON BUSINESS IN CANADA

That a non-resident person undertakes an activity that can be included within the meaning of the term "business," as that term is defined in subsection 123(l) of the Act, does not establish whether that person is in fact carrying on that business in Canada. At the same time, a non-resident person can be carrying on business in Canada even though they may not have a permanent establishment in Canada, as defined in subsection 123(l) of the Act.(12)

A. Guidelines

When determining whether a non-resident person is carrying on business in Canada, the following criteria should be applied to the facts of a particular situation:

* the place where the contract is made,

* the place where the operations from which profits

arise take place, and

* other factors.

Generally, the first two factors are the most predominant factors that courts have considered when determining whether a business is carried on in a particular place.

1. Place Where Contract is Made. Stated broadly, the question might be: In what jurisdiction is the contract for the supply of goods or services concluded? Two important components of a contract are an offer and acceptance. A contract is concluded where the offer is accepted. Accordingly, where a non-resident supplier accepts orders outside Canada for shipment to Canada, the contract will generally be made outside Canada.

Consider the following example. A Montreal drug manufacturer that annually shipped about $450,000 worth of its product to British Columbia was held not to be "carrying on business" in British Columbia since the company received and filled orders in Montreal. Geigy (Canada) Ltd. v. MNR, [1969] CTC 79.

A well-stated summary of the English law is found in the English case of Crookston Bros. v. Furtado, 5 TC 602 at 615:

Viewing the matter in light of authority, I consider

that the following propositions may be deduced from

the numerous cases which have been decided - In

the first place if contracts are concluded by or on

behalf of a foreigner, and the goods delivered and

payment made, all within the United Kingdom, it

seems clear that the foreigner will be held to exercise

a trade in this country. Next I think the result will

be the same if the contracts are concluded and delivery

made in this country, although the payments are

received abroad.

In another English case - Watson v. Sandie and Hull, 3 TC 611 - it was stated:

Lastly, ... if the contracts are concluded in this

country that fact alone will be sufficient to constitute

an exercise of trade here.

The Geigy case illustrates that it does not necessarily follow that because a non-resident makes supplies in Canada, it is carrying on business in Canada. Moreover, that payment is made in Canada or that delivery is made in Canada will, taken alone, not be sufficient to sustain a finding that a firm is a carrying on business in Canada.

2. Place Where the Operations from which Profits Arise Take Place. The place where the contract is made is not always dispositive of whether business is carried on in a particular jurisdiction. There are cases where the contract is made outside Canada, and yet the manufacture of the goods, some negotiation of the terms, and complete execution of the contract take place in Canada so that the trade was, in substance, exercised in Canada. The question then is this: where do the operations take place from which the profits arise?

In the English case of Firestone Tyre & Rubber Co. Ltd. v. Lewellin, 37 TC 111, the U.S. parent company contracted outside the United Kingdom to supply goods to a Swedish distributor through the parent's subsidiary in the United Kingdom. The U.S. parent argued that it sold the goods to its U.K subsidiary who then sold them to the distributor in Sweden. In practice, the U.K. subsidiary received the order directly from the Swedish distributor and made delivery to a port in the United Kingdom and received payment, which was credited to the parent after deducting a commission. Based on these facts, the U.S. parent was held to be carrying on business in the United Kingdom by virtue of the activities undertaken by its agent, the U.K subsidiary.

If a non-resident person has no physical presence in Canada, either directly through employees or through agents, then it will generally be difficult to say that the profitmaking operation is in Canada. For example, where the very object of the transaction is the provision of a service by a non-resident in Canada and the non-resident enters Canada to carry out the terms of the undertaking and to perform the services that was the principal object of the contract, then the operations producing profits will likely be considered to take place at a site in Canada. The service to be performed in Canada, however, must be the object of the contract and not merely ancillary to a service or goods to be supplied outside Canada. Hence, if the services of a technician were part of the contract for the supply of machinery that had been purchased outside Canada and the service was not the object of the contract, the site at which the operations producing profit take place will not likely be in Canada.

B. Other Factors

Numerous other factors have also been considered by the courts when determining whether a person is carrying on business in a particular place, including:

* the place where delivery of goods is made;

* the place where payment is made;

* the place where the goods in question are manufactured;

* the place where the orders are solicited;

* the place where an inventory of the goods is maintained;

* the existence of any branch or office in the particular

place;

* the existence of any agents or employees authorized

to transact business on behalf of the non-resident

person in the particular place;

* the place where bank accounts are maintained;

* the place where back-up services under the contract

are provided; and

* a list of the names and business of the non-resident

person in a directory in the particular place.

A non-resident person who has no physical presence in Canada and who solicits orders in Canada for the supply of tangible personal property (other than in respect of prescribed goods to which subsection 240(4) applies) is not likely to be considered carrying on business in Canada.

Isolated business transactions carried out in Canada that are part of a business of a non-resident person carried on outside Canada will, in many instances, not be viewed as the carrying on of that business in Canada, because the referenced factors will usually not be met to a sufficient degree. Therefore, even though the contract may be given and even accepted in Canada, the failure to meet other significant factors - such as the site at which the operations producing profit take place - may indicate that the nonresident person is not carrying on business in Canada.

In general, to be considered to be carrying on business in Canada, a non-resident must have a significant presence in Canada. Although a non-resident may not be carrying on business in Canada and therefore not required to register for GST purposes, the non-resident may wish to voluntarily register for the GST. Subsection 240(3) of the Act affords the non-resident this opportunity where the non-resident person is engaged in a commercial activity in Canada or, in the ordinary course of carrying on business outside Canada, the non-resident person solicits orders for supplies of tangible personal property for delivery in Canada.(13)

EXAMPLES

1. In the case of GLS Leasco Inc. et al. v. MNR, [1968] 2 CTC 2034, a company incorporated in the United States was found to be carrying on business in Canada based on the following factors:

* the Company intended to do business in Canada;

* there was a Canadian bank account;

* all of the equipment was purchased in Canada;

* two employees of the related Canadian company

were always available to help the U.S. company in

Canada;and

* much supervision of the foreign operation took

place in Canada.

2. A U.S. aircraft lessor who has no employees in Canada, no facilities (either management, sales, or service) of any kind in Canada, no bank accounts in Canada and is not registered, is approached by a Canadian company that wishes to lease an aircraft. The lease is accepted by the lessor in the United States, the aircraft is delivered by the lessor in the United States, and the aircraft is serviced in Canada by the lessee at its own expense. In such a case, the lessor will not be considered to be carrying on business in Canada.

3. A U.S. direct mail importer sells goods to Canadian consumers through a catalogue. The non-resident has no office in Canada, no employees or agents in Canada, and no bank accounts in Canada. The Canadian customer calls a 1-800 number in the United States or sends an order form with payment to the United States and the non-resident fills the order by shipping the goods to the Canadian customer. In this case, the contract is concluded in the United States, the place where profits arise is in the United States and all other guidelines indicate that the non-resident is not carrying on business in Canada.

4. A non-resident business located outside Canada supplies goods by way of sale to Canadians in Canada. The non-resident accepts the contract outside Canada, imports the goods into Canada and delivers them to the customer. Payment is made in Canada. Applying the guidelines to this situation, it is determined that, other than delivery and payment being made in Canada, none of the other criteria are applicable. In the absence of other factors, the nonresident will not be considered to be carrying on business in Canada. GST will be collected from the non-resident, however, at the time of importation.

CONCLUSION

The foregoing summarizes the policy that Revenue Canada, Customs and Excise uses in determining whether a nonresident of Canada is carrying on business in Canada and, therefore, required to register for Canadian GST purposes. Additional information on other relevant subjects affecting non-residents for GST purposes can be found in the guide, Doing Business in Canada - A Guide for Non-residents.(14)

Notes

(1) Subsection 123(1) of the Excise Tax Act provides that "individual" means a natural person. (2) To obtain a copy of IT-221R2, please contact: International Taxation Office, Taxpayer Services Section, 2540 Lancaster Road, Ottawa, Ontario, Canada, K1a OL8. (3) Subsection 123(1) of the Excise Tax Act provides that "person" means an individual, partnership, corporation, trust or estate, or a body that is a society, union, club, association, commission, or other organization of any kind. (4) Subsection 132(1) of the Excise Tax Act provides, as follows:

Person resident in Canada. - For the purposes of this Part, a

person shall be deemed to be resident in Canada at any time

(a) in the case of a corporation, if the corporation is incorporated

or continued in Canada and not continued elsewhere;

(b) in the case of a partnership, an unincorporated society,

a club, an association or an organization, or a branch thereof,

if the member, or a majority of the members, having

management and control thereof is or are resident in Canada

that time; or

(c) in the case of a labour union, if it is carrying on activities

as such in Canada and has a local union or branch in

Canada at that time. (5) Subsections 132(2), (3), and (4) of the Excise Tax Act provide, as follows:

(2) Permanent establishment of non-resident. - For the purposes

of this Part, where a non-resident person has a permanent

establishment in Canada, the person shall be deemed to

be resident in Canada in respect of, but only in respect of,

activities of the person carried on through that establishment.

(3) Permanent establishment of resident. - For the purposes of

this Part, where a person who is resident in Canada has a

permanent establishment in a country other than Canada, the

person shall be deemed to be a non-resident person in respect

of, but only in respect of, activities of the person carried on

through that establishment.

(4) Supplies between permanent establishments. - For tbe

purposes of this Part, where a person carries on a business

through a permanent establishment of the person in Canada

and through another permanent estabhshment of the person

outside Canada,

(a) any transfer of personal property or rendering of a

service by the establishment in Canada to the establishment

outaide Canada shall be deemed to be a supply of the

property or service; and

(b) in respect of that supply, tbe permanent establishments

shall be deemed to be separate persons who deal with each

other at arm's length. (6) Subsection 240(1) of the Excise Tax Act provides, as follows:

Where registration required. - Every person who is engaged

in a commercial activity in Canada, other than

(a) a person who is a small supplier,

(b) a person whose only commercial activity is making supplies

of real property by way of sale otherwise than in the

course of a business, and

(c) a non-resident person who does not carry on any business

in Canada,

shall apply to the Minister before the day that is thirty days

after the day the person first makes a taxable supply in Canada,

otherwise than as a small supplier, in the course of that

activity, to be registered for the purposes of this Part. (7) Subsection 143(1) of the Excise Tax Act provides, as follows:

Supply by non-resident. - For the purposes of this Part, a

supply of personal property or a service made in Canada by a

non-resident person shall be deemed to be made outside Canada,

unless

(a) the supply is made in the course of a business carried on

in Canada;

(b) at the time the supply is made, the person is registered

under Subdivision d of Division V; or

(c) the supply is the supply of an admission in respect of a

place of amusement, a seminar, an activity or an event

where the non-resident person did not acquire the admission

from another person. (8) Subsection 248(1) of the Income Tax Act provides, as follows:

"Business" - "Business" includes a profession, calling, trade,

manufacture or undertaking of any kind whatever and, except

for the purposes of paragraph 18(2)(c), section 64.2 and paragraph

110.6(14)(f), an adventure or concern in the nature of

trade but does not include an office or employment; .... (9) Section 253 of the Income Tax Act provides, as follows:

Extended meaning of carrying on business. Where, in a taxation

year, a non-resident person

(a) produced, grew, mined, created, manufactured, fabricated,

improved, packed, preserved or constructed, in whole or

in part, anything in Canada whether or not he exported

that thing without selling it prior to exportation, or

(b) solicited orders or offered anything for sale in Canada

through an agent or servant whether the contract or transaction

was to be completed inside or outside Canada or

partly in and partly outside Canada,

he shall be deemed, for the purposes of this Act, to have been

carrying on business in Canada in the year. (10) Subsection 240(2) of the Excise Tax Act provides, as follows:

Non-resident performers, etc. - Where a person enters Canada

for the purpose of making taxable supplies of admissions in

respect of a place of amusement, a seminar, an activity or an

event, the person shall, before making any such supply, apply

to the Minister to be registered for the purposes of this Part. (11) Subsection 240(4) of the Excise Tax Act provides, as follows:

Non-resident suppliers. - For the purpose of subsection (1), a

non-resident person who in Canada solicits orders for the supply

by the person of tangible personal property in respect of

which subsection 143(2) would apply if the person making the

supply were a registrant, or offers such tangible personal property

for supply, whether through an employee or agent or by

means of advertising directed to the Canadian market, shall

be deemed to carry on business in Canada. (12) Subsection 123(1) of the Excise Tax Act provides that "permanent establishment," in respect of a particular person, means -

(a) a fixed place of business of the particular person, including

-

(i) a place of management, a branch, an office, a factory or
 a workshop, and
 (ii) a mine, an oil or gas well, a quarry, timberland or any
 other place of extraction of natural resources,


through which the particular person makes supplies or

(b) a fixed place of business of another person (other than a

broker, general commission agent or other independent agent

acting in the ordinary course of business) who is acting in

Canada on behalf of the particular person and through whom

the particular person makes suppllies in the ordinary course of

business; .... (13) Subsection 240(3) of the Excise Tax Act provides, as follows:

Registration permitted. - A person who is engaged in a commercial

activity in Canada, who is a non-resident person who

in the ordinary course of carrying on business outside Canada

regularly solicits orders for the supply of tangible personal

property for delivery in Canada, or who is a listed financial

institution resident in Canada, may apply to the Minister to be

registered for the purposes of this Part. (14) To obtain a copy of Doing Business in Canada - A Guide for Non-Residents, please contact: Revenue Canada, Customs & Excise, Distribution Centre, Connaught Building, Ottawa, Ontario, Canada, K1a OL5.

MITCH BLOOM is Acting Manager and GERRY O'REILLEY is a Senior Policy Officer in the Taxing Provisions Unit of General Tax Policy and Legislation (Goods and Services Tax) of Revenue Canada, Customs and Excise in Ottawa, Canada.
COPYRIGHT 1992 Tax Executives Institute, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
Printer friendly Cite/link Email Feedback
Author:O'Reilley, Gerry
Publication:Tax Executive
Date:May 1, 1992
Words:4205
Previous Article:Changes in the industry specialization program.
Next Article:The new rules for accounting method changes.
Topics:


Related Articles
Availability of GST input tax credits on pension plan expenses.
Recent reporting and disclosure requirements may apply to certain nonresidents after 1991.
U.S. estate taxation of nonresident aliens.
Proposed improvements to GST Technical Bill: October 1, 1996.
Revenue Canada questions & answers: December 10 and 11, 1996.
Canadian legislation on foreign investment entities and non-resident trusts.
Tax issues for nonresident aliens.
Draft legislation relating to foreign investment entities and non-resident trusts: May 13, 2003.
TaxTalk highlights: real estate withholding, trusts and online sales taxes.
NRA tax reporting.

Terms of use | Copyright © 2016 Farlex, Inc. | Feedback | For webmasters