NO: IT-137R3
DATE: January 31, 1990
SUBJECT: INCOME TAX ACT
Additional Tax on Certain Corporations Carrying on Business in Canada
REFERENCE: Section 219 (also sections 88.1, 219.1 and 219.2 and subsection 52(7) of the Act, and section 808 of the Regulations)
Application This bulletin replaces and cancels Interpretation Bulletin IT-137R2 dated September 8, 1982. Current revisions are designated by vertical lines.
Summary This bulletin discusses the situations in which a Part XIV tax becomes payable, the rate of tax and the method of determining the amount to which it applies. Section 219 imposes a special tax, generally referred to as “Branch Tax”, on certain corporations (generally non-Canadian corporations) carrying on business in Canada. This tax, which is in addition to the normal Part I tax, is imposed on the corporation’s after-tax Canadian source income, as adjusted by deducting an allowance for investment in property in Canada. Section 219.1 imposes a special tax (see 2 below) payable when a corporation emigrates from Canada.
Discussion and Interpretation
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 the year, a Canadian corporation as defined in paragraph 89(1)(a) 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 has emigrated from Canada under circumstances described in section 88.1. Where this is the case, section 219 will initially apply to the taxation year deemed by paragraph 88.1(c) to have commenced at the time of emigration.
2. A corporation which has emigrated from Canada (i.e., one which is deemed by paragraph 88.1(d) not to be a Canadian corporation at a particular time and at all subsequent times) is subject to tax under section 219.1 for the taxation year that is deemed by paragraph 88.1(c) to have ended at the time of emigration. The tax is 25 percent of the amount by which the fair market value of its properties exceeds the sum of its paid-up capital (determined immediately before the year end) and its liabilities at the year end, other than its liability to pay dividends.
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 IT-277R “Branch Tax – Effect of Tax Treaties”). 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) does limit the rate of tax imposed on dividends paid by a corporation resident in Canada to a 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 may not exceed the maximum rate of Canadian non-resident withholding tax applicable to dividends under that treaty.
4. The amount on which the 25 percent rate of tax (or any lower rate of tax applicable in accordance with a treaty) is levied differs for non-Canadian corporations not resident in Canada and non-Canadian corporations resident in Canada, whether resident for the whole year or part of the year. A summary of the required calculations appears in 5 and 6 below under those two headings. It should be noted that the primary figure in the calculation is, for a corporation not resident in Canada at any time in the year, its “taxable income earned in Canada” for the taxation year and, for a corporation resident in Canada for part or all of the year, its “taxable income”, which includes the corporation’s world income for the year.
Non-Canadian Corporations Not Resident in Canada
5. A non-Canadian corporation that was not resident in Canada at any time in the taxation year is subject to tax under section 219 on an amount calculated as follows:
(i) “Taxable income earned in Canada” (within the meaning of that term in subsection 248(1)) for the taxation year
Add
(ii) amount deducted under section 112 in computing taxable income earned in Canada for the taxation year in respect of taxable dividends received
(iii) amount deducted as a resource allowance in computing taxable income earned in Canada for the taxation year
(iv) excess of fair market value of “qualified property” disposed of in the taxation year over proceeds of disposition (see 7 below for details), and
(v) amount claimed for the immediately preceding taxation year as an allowance in respect of its investment in property in Canada
Deduct
(vi) net taxable capital gains (i.e., taxable capital gains minus allowable capital losses) on the disposition of “taxable Canadian properties” (see 9 below) not used or held in the year in the course of carrying on business in Canada (not to exceed net taxable capital gains from all dispositions in the year of taxable Canadian properties)
(vii) tax payable under Part I for the taxation year less the portion of that tax attributable to net taxable capital gains specified in (vi) above
(viii) non-deductible income taxes payable to a provincial government for the taxation year less the portion of such income taxes attributable to the net taxable capital gains specified in (vi) above
(ix) allowance claimed for the year in respect of the investment in property in Canada (applicable only if the corporation was carrying on business in Canada at the end of the taxation year), not exceeding the maximum amount specified in subsection 808(1) of the Regulations (see 13 below)
(x) amounts included in computing taxable income earned in Canada for the taxation year in respect of Crown resource royalties or the like, to the extent such amounts are not deductible under (viii) or (ix) above, and taxes paid or payable to the Crown (generally in respect of production or processing of petroleum prior to October 1986 – see 19 below) under the Petroleum and Gas Revenue Tax Act, and
(xi) excess of fair market value of any “qualified property” disposed of in the taxation year over the sum of the increase in paid-up capital resulting from the disposition plus the fair market value of the non-share consideration received (see 7 below for details)
Amount subject to tax under section 219
Non-Canadian Corporations Resident in Canada
6. A non-Canadian corporation that was resident in Canada at any time in the taxation year is subject to tax under section 219 on an amount calculated as follows:
(i) “Taxable income” (within the meaning of that term in subsection 248(1)) for the taxation year
Add
(ii) amount deducted under section 112 in computing taxable income for the taxation year in respect of taxable dividends received
(iii) amount deducted as a resource allowance in computing taxable income for the taxation year
(iv) excess of fair market value of “qualified property” disposed of in the taxation year over proceeds of disposition (see 7 below for details)
(v) amount claimed for the immediately preceding taxation year as an allowance in respect of its investment in property in Canada, and
(vi) amount claimed for the immediately preceding taxation year in respect of the cumulative excess of dividends paid by the corporation as determined in accordance with (xii) below
Deduct
(vii) tax payable under Part I for the taxation year
(viii) non-deductible income taxes payable to a provincial government for the taxation year
(ix) amount deducted from tax otherwise payable under Part I for the taxation year as a credit in respect of taxes paid to a foreign government
(x) 50 percent of the amount of net income (see 8 below) from non-Canadian sources for the taxation year (which 50 percent represents the amount of such income minus an assumed income tax rate of 50 percent thereof) with the deductible amount not to exceed 50 percent of the corporation’s taxable income for the taxation year
(xi) allowance claimed for the year in respect of the investment in property in Canada (applicable only if the corporation was carrying on business in Canada at the end of the taxation year), not exceeding the maximum amount specified in subsection 808(1) of the Regulations (see 13 below)
(xii) allowance claimed for the year in respect of the dividends paid by the corporation after it last became resident in Canada, while resident in Canada and before the end of the year, to the extent that the aggregate of such dividends exceeds the aggregate of amounts each of which is equal to 50 percent of the lesser of
(A) the corporation’s taxable income, and
(B) the corporation’s net income (see 8 below) from non-Canadian sources
for each taxation year ending after it last became resident in Canada and not later than the end of the year
(xiii) amounts included in computing taxable income for the taxation year in respect of Crown resource royalties or the like, to the extent such amounts are not deductible under (viii) or (xi) above, and taxes paid or payable to the Crown (generally in respect of production or processing of petroleum prior to October 1986 – see 19 below) under the Petroleum and Gas Revenue Tax Act, and
(xiv) excess of fair market value of any “qualified property” disposed of in the taxation year over the increase in paid-up capital resulting from the disposition plus the fair market value of the non-share consideration received (see 7 below for details)
Amount subject to tax under section 219
7. Paragraph 219(1)(a.4) (described in 5(iv) and 6(iv) above) sets out certain amounts to be included in computing the amount subject to tax under section 219, and paragraph 219(1)(k) (described in 5(xi) and 6(xiv) above) sets out certain amounts that may be deducted in computing the amount subject to such tax. These additions and deductions are designed to facilitate the incorporation by non-Canadian corporations of their Canadian branch operations. Prior to the enactment of these provisions, a non-Canadian corporation incorporating its branch business faced the “recapture” of the investment allowance it claimed for the prior taxation year with no ability to offset any portion of this “recapture” even though the property transferred from the branch continued to be used in a business in Canada. The provisions apply with respect to the transfer of “qualified property” to a Canadian corporation wholly owned by the non-Canadian corporation immediately after the transfer where the consideration received by the non-Canadian corporation includes shares of the Canadian corporation. Qualified property is property that immediately before the transfer was used by the non-Canadian corporation to gain or produce income from its Canadian business. Mechanically, paragraph 219(1)(a.4) requires an addition, in computing the amount subject to tax under section 219, of the excess of the fair market value of the qualified property at the time of disposition over the non-Canadian corporation’s proceeds of disposition of the property. If the branch property is transferred under subsection 85(1), the proceeds of disposition thereof will be determined under that subsection. Paragraph 219(1)(k) permits a deduction, in computing the amount subject to tax under section 219, of the amount by which the fair market value of the qualified property at the time of its disposition exceeds the aggregate of the amount of the increase in the paid-up capital of the capital stock of the Canadian corporation as a result of the disposition and the fair market value, at the time of receipt, of any non-share consideration given by the Canadian corporation. Subsection 52(7) establishes the adjusted cost base of shares received by the non-Canadian corporation in such transactions.
8. For the purposes of 6(x) and 6(xii) above, the term “net income” means the amount by which
(a) the aggregate of the corporation’s incomes for a taxation year from businesses or properties and its taxable capital gains for the year from dispositions of property exceeds
(b) the aggregate of the corporation’s losses for the year from businesses or properties and its allowable capital losses for the year from dispositions of property.
“Taxable Canadian Property”
9. For purposes of 5(vi) above, the term “taxable Canadian property” has the meaning assigned to it in paragraph 115(1)(b) (see IT-420R2 “Non-Residents – Income Earned in Canada”).
Exempt Corporations
10. A corporation is not liable for tax under section 219 for a taxation year if it was, throughout the year,
(a) a bank,
(b) a corporation whose principal business was
(i) the transportation of persons or goods,
(ii) communications, or
(iii) mining iron ore in Canada, or
(c) a corporation exempt from tax under section 149.
11. If the principal business of a corporation throughout the world is the transportation of persons or goods, or communications, it is exempt from tax under section 219 regardless of the nature of its Canadian business. However, in the case of a corporation mining iron ore in Canada, its operation of that nature in Canada must be its principal business throughout the world if it is to qualify for exemption under section 219.
Non-Resident Insurance Corporations
12. Subsections 219(4) to (8) are applicable to non-resident insurance corporations carrying on business in Canada. Special rules are provided to allow insurance corporations to transfer branch assets to a “qualified related corporation” in order to defer the 25% tax payable under subsection 219(5.1). See comments in 3 above on rates of tax and the possible application of a bilateral income tax treaty.
Allowance in Respect of Investment in Property in Canada
13. The maximum allowance for a taxation year, referred to in 5(ix) and 6(xi) above, that may be claimed by a corporation in respect of its investment in property in Canada is calculated, pursuant to subsection 808(1) of the Regulations, as follows:
(i) the amount of the corporations’s “qualified investment in property in Canada” (see 14 below) at the end of the taxation year
Deduct
(ii) the total of allowances in respect of an investment in property in Canada claimed as a deduction under subsection 110B(1) of the pre-1972 Income Tax Act for taxation years ending before 1972, and
(iii) the capital investment of the corporation in property in Canada at the end of its 1960 taxation year
Maximum allowance
14. The qualified investment in property in Canada of a corporation at the end of a taxation year is calculated in accordance with the rules in subsections 808(2) and (3) of the Regulations unless the corporation, at the end of the taxation year, was a member of a partnership that carried on business in Canada at any time in the year. In the latter case, qualified investment in property in Canada is calculated in accordance with the rules in subsections 808(4), (5) and (6) of the Regulations.
15. When a corporation that has been subject to tax under section 219 ceases to carry on business in Canada, the amount deducted for the immediately preceding taxation year in respect of its qualified investment in property in Canada must be included in the amount subject to tax under section 219 for the taxation year in which the business ceased, but no allowance for such investment may be claimed as at the end of that year. (However, see comments in 7 above concerning a corporation ceasing to do business on the sale of its business assets to a Canadian subsidiary wholly-owned corporation.) Although no investment allowance may be claimed at the end of the year, no “recapture” is made of allowances (see 13(ii) above) claimed for 1971 and prior taxation years.
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 that qualify need not be identified with the business carried on in Canada. An amount deposited with a bank or other recognized financial institution, in either Canadian or a foreign currency, qualifies only if the deposit is with a branch or other office in Canada of that institution. Prepaid expenses or deposits do not qualify as allowable liquid assets or otherwise as an investment in property.
17. The term “cost amount” where used in section 808 of the Regulations has the meaning assigned to it in subsection 248(1) of the Act.
Returns, Assessments, Payments and Appeals
18. Subsection 219(3) provides that the provisions of Division J and, with some exceptions such as the requirement to pay tax by instalments, Division I of Part I apply to tax payable under sections 219 and 219.1. Before October 29, 1985, the provisions of Division J did not apply with the result that assessments under sections 219 and 219.1 previously could not be appealed to the Tax Court of Canada or to the Federal Court.
Petroleum and Gas Revenue Tax Act (PGRT Act)
19. On December 19, 1986, the PGRT Act was repealed effective with respect to income or loss of a taxpayer from a source that is
(a) the production after September 1986 of petroleum or gas;
(b) the processing in Canada after September 1986 of petroleum to any stage that is not beyond the stage of crude oil or its equivalent; or
(c) any amount received or receivable by the taxpayer as, on account of or in lieu of payment of, or in satisfaction of, a production royalty or resource royalty computed by reference to the amount or value of production after September 1986 of petroleum or gas.