Section 115

During peak season, Canco, which transports passengers to destinations inside and outside Canada, is supplied planes and non-resident pilots and crew by an arm's length U.K. resident ("Forco") who is the pilots' and crew's employer, to transport Canco's passengers. In finding that s. 115(3) did not apply to the non-resident pilots employed by Forco (i.e., they were not "indirectly" employed by a Canadian airline), CRA stated:

[P]ilots employed by a non-resident airline corporation will generally not be subject to this measure. …[but] the taxable income earned by a non-resident from an office or employment exercised in Canada must nevertheless be computed for purposes of…subparagraph 115(1)(a)(i). ..[T]he attribution of income to Canada must be reasonable and may be based on the allocation methods provided in Sutcliffe v. The Queen, 2006 TCC 812 and Price v. The Queen, 2011 TCC 449.

Formerly, CRA generally had presumed for purposes of applying the domestic provisions of the Act (s. 115(1)(a)(i)) that an employee stock option benefit is in respect of employment exercised by the employee in the year in which the option was granted for purposes of determining the portion of the stock option benefit which was attributable to the exercise of Canadian employment of the optionee.

However, for stock options exercised after 2012, the CRA will apply the principles set out in para. 12 to 12.15 of the OECD Commentary on Article 15 to allocate a stock option benefit for purposes of the Income Tax Act, unless an income tax treaty otherwise specifically applies. Under these principles, the stock option benefit typically will be allocated based on the number of days of employment exercised in Canada during the vesting period compared to the total number of days of exercise of employment during that period.

USCo, which is a qualifying person for purposes of the Canada-US Income Tax Convention and is a wholly-owned subsidiary of a Canadian public company, employed a US-resident individual and performed employment duties for USCo in Canada for 55, 100 and 75 days in 2009, 2010 and 2011, respectively. On January 1, 2009, the US employee was granted stock options by Canco in consideration for his duties of employment performed for USCo and, when the options were exercised, USCo paid Canco a sum equal to the in-the-money value of the options at the time of such exercise.

Before considering the effect of the Canada-US Convention, CRA stated that

Canada's default position regarding the allocation of the stock option benefit is that a stock option benefit is allocable to the services rendered in the year of grant, unless it is clear from the circumstances that some other period is more appropriate, and vesting is not relevant.

Accordingly, if in 2009, the employee worked 55 days in Canada out of a total of 315, and he realized a benefit of $20,000 when he exercised the options on December 31, 2010, CRA would consider 55/315 of that benefit to be taxable in Canada in 2010.

a US-resident individual who is a director of a Canadian public corporation, who receives retainer fees in excess of $10,000 annually and who is expected to attend quarterly meetings of the board of directors in Canada will be required to include the amount of the benefit on exercise of the options in his income by virtue of ss. 7 and 1115(1)(a)(i), and will be entitled to the s. 110(1)(d) deduction where the usual conditions are satisfied. Where the individual's services are exclusively performed in Canada, the entire benefit will be sourced to Canada based on the allocation method set out in Annex B to the 5th Protocol to the Canada-US Convention. The amount of the required withholding (based on graduated rates) can take the s. 110(1)(d) deduction into account.

Where rights under a share appreciation rights plan are granted while an employee is resident in Canada, but redeemed when the employee is a non-resident, the portion of the SAR benefit that is attributable to services rendered in Canada (or outside Canada if the employee was resident in Canada at that time) is "taxable income earned in Canada" to the non-resident.

"Generally, the stock option benefit relating to the options granted to an individual while he or she is employed by a foreign employer while the individual was resident and employed only in a foreign country that were exercised after the individual ceased to be resident in Canada will not be included in the individual's income under subparagraph 115(1)(a)(i) of the Act because the entire stock option benefit is considered to be attributable to the individual's duties of employment performed in the foreign country for the foreign employer in the year the stock option was granted."

"Where the duties of a particular office or employment are performed partly in Canada and partly outside of Canada, a reasonable apportionment of the related income is necessary. This apportionment is usually calculated on a per diem basis having regard to the rate of remuneration applicable at that time."

RC declined to rule that a non-resident director's fees could be allocated to Canada only to the extent of the number of days worked in Canada divided by the number of days in the year.

Where a U.S.-resident was employed for several years by a wholly-owned Canadian subsidiary of a U.S. public company and in the course of his employment was granted stock options to purchase shares of the U.S. parent, a stock option benefit realized by him when exercising the options after he ceased to be employed and resident in Canada would be taxable in Canada as though he were still an employee of the Canadian subsidiary.

Disability payments received by a U.S. resident under a disability policy maintained by his former employer will be subject to Canadian tax if the disability insurance premiums related to employment in Canada, irrespective whether the duties of employment to which the payments related were performed in a previous year.

A non-resident director of a Canadian corporation who exercises his stock option is taxable under s. 7(1) to the extent that the granting of the stock option related to services performed in Canada, and the Canadian corporation would have an obligation to file a T4 Supplementary.

In response to what CRA treated as a general inquiry, it referenced the question of whether the non-resident company (which received royalties from digital shows in Canada as well as selling products to Canadian residents and providing services to them) was carrying on business in Canada, and stated:

For guidance regarding factors to consider when determining where a particular business (or a part of the business) is carried on, see paragraphs 1.52-1.56 of S5-F2-C1: Foreign Tax Credit... .

Canco will pay a fee to an India partnership providing technical support based on a percentage of the total technical support fee revenues to be collected by Canco from its customers located in Canada and the U.S. In providing general comments on whether the non-resident members of the partnership may be considered to carry on business in Canada, CRA stated:

[I]n the case of a service business, the business would generally be considered to be carried on at the place where the services are performed.

The Directorate agreed that the taxpayer, which was a Canadian manufacturer transferring some of its goods to a Japanese branch for sale there, was overstating its profits for purposes of s. 126(2), by treating most or all of the profits on the sale of such products as being profits of the Japanese branch. The taxpayer was required to follow the same method it used to compute its net foreign business income under the Japanese Treaty (namely, computing a notional cost of sales based on an arm's length value of the goods "sold" by the manufacturing division in Canada) as this gave a truer picture of the profits earned in Japan by the Japanese branch.

In reaching this conclusion, CRA stated that it disagreed with the taxpayer's position that "the place of contract is the primary determinant of where business is carried on," and stated:

Under Common Law principles, a business is generally considered to be carried on in the place where the operations from which the profits arise are located. The weight given to any particular factor to determine this place depends on the nature of the business. One factor is the place of manufacture or production. Another factor which is indicative of the location of a business is the place where the business' profit-producing contracts are made (based on old case law such as Grainger v. Gough (Surveyor of Taxes) [1896] A.C. 325 (H.L.) and Firestone Tyre v. Lewellin (HM Inspector of Taxes) (1957), 37 TC 111)). For example, in Twentieth Century Fox Film Corporation, 85 DTC 5513 (FCTD), the court did not put much weight on where the contracts were made.

Ruling given that the expansion of services provided by a Canadian corporation ("Canco") to its affiliated non-resident administrator of investment funds (the "Funds") including processing subscriptions, transfers and redemptions and handling related correspondence, processing distributions, conducting anti-money laundering due diligence, publishing the NAVs, disbursing fees, maintaining a register of shareholders, dispatching shareholder meeting materials and audited financial statements, and providing various "middle office" accounting assistance, would not cause the Funds or the Administrator to be carrying on business in Canada for purposes of ss. 2(3)(b) and 115(1), or Part XIV. The statement of facts indicate that no resolutions will be passed by the Administrator or the Funds to appoint Canco as agent, "the various contracts entered in by Canco in the course of carrying on its business in Canada will create rights and obligations that are personal to Canco vis-à-vis the third parties", Canco will have limited contact with the investors in the Funds and "in particular, Canco does not and will not handle the receipt of monies paid by investors upon the investors' subscription for interest in the Funds" and "subscriptions are accepted or rejected by the Funds, not by Canco or the Administrator".

Ruling that the delegation by a non-resident service provider ("C Limited") to a non-resident investment fund (the "Fund") of accounting and valuation services (e.g., preparing books and records and financial statements, computing NAV each month and calculating redemption amounts and distributions) and investor services (including maintaining a register of investors, processing subscriptions, redemptions and transfer requests, monitoring compliance with anti-money laundering rules, maintaining capital accounts, and mailing or emailing periodic statements to investors) to a related Canadian corporation ("Canco") where "Canco will have no right to directly affect the legal relations of C Limited as regards to other persons and will have no authority to make contracts on behalf of C Limited" will not result in the Fund or C Limited carrying on business in Canada for purposes of ss. 2(3)(b), 115(1) or Part XIV. In the summary, CRA stated that "a business is carried on where the profit producing activity takes place and the profit producing activity of the Fund and the non-resident service provider are not in Canada".

Interest on money borrowed by a non-resident individual to make a capital contribution to a partnership that carries on business in Canada through a permanent establishment will be deductible to the extent it is allocable to a business source of income and the tests in s. 20(1)(c) are satisfied.

Ruling that a Canadian company engaged by a non-resident fund manager to provide accounting and clerical services in Canada would not thereby cause the fund or its manager to be considered to be carrying on business in Canada.

Where a non-resident corporation has contracted to perform certain administrative duties for other non-resident corporations, the fact that it has a non-related Canadian company perform certain accounting and clerical services for it under a sub-contract will not, by itself, cause it or its non-resident clients to be carrying on business in Canada.

Discussion of allocation of business income between Canada and a foreign country where: a Canadian corporation, acting as a wholesaler, buys property in Canada and sells it to a foreign purchaser; a Canadian corporation manufacturing property in Canada, sells it to a purchaser outside Canada; the Canadian branch of a foreign corporation carries on the above activities; and a corporation resident in a non-treaty country imports property into Canada.

Mr. A, a U.S. resident, grants the right to drill for or take the oil & gas from his Canadian freehold property to a Canadian company, in consideration for an upfront bonus of $100,000, and annual royalties payable out of any oil & gas production. The fair market value of this royalty right is $300,000.

After noting that these transactions result in a negative cumulative Canadian oil and gas property expense ("CCOGPE") pool, that any resulting credit balance would be deducted from his cumulative Canadian development expense ("CCDE") pool under variable L, and any negative balance CCDE balance for the year is added to his income pursuant to ss. 66.2(1), 59(3.2)(c) and 115(1)(a)(ii) or (iii.1), CRA noted that a.115(1)(a)(ii) applies if the amount required to be included in income is from a business carried on by Mr. A, whereas s. 115(1)(a)(iii.1) applies to any amount required by s. 59(3.2)(c) to be included in income over and above the amount included in income from a business carried on by Mr. A.

If an individual ceases to be a resident of Canada and subsequently disposes of depreciable properties used in a business carried on outside Canada, the recapture of depreciation will be included in his income under s. 115(1)(a)(iii.2) if s. 2(3) applies, that is, if in the taxation year or any previous taxation years he was employed in Canada, carried on business in Canada or disposed of taxable Canadian property.

A lump sum payment in compensation for a loss of employment at a French subsidiary is made by Canco to a non-resident of Canada who had been seconded to the subsidiary. CRA first found that s. 212(1)(j.1) would apply to this payment, so that it would not be taxable pursuant to s. 115(2)(e)(i).