What constitutes “Carrying On Business” in Canada?
By Sabina Mexis, Devry Smith Frank LLP
The Excise Tax Act (“ETA”) does not clearly define what “carrying on business” means for purposes of the GST. “Business” is defined in subsection 123(1) of the ETA as follows:
Business 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.
This definition is not exhaustive. It should also be noted that the concept of “carrying on business” for purposes of the ETA differs from that set out in the Income Tax Act (the “ITA”). Notably, the main difference in the definitions of “business” for ETA and ITA purposes is that the ITA requires that a business should have an expectation of profit, whereas the ETA does not. In other words, an activity may constitute a business for ETA purposes even if there is no expectation of profit. Therefore, a non-resident person may be carrying on business for income tax purposes but not necessarily considered to be carrying on business for GST purposes. Similarly, if a non-resident person is found to be carrying on business for GST purposes, that does not necessarily mean that such person is considered to be carrying on business in Canada for income tax purposes.
The Canada Revenue Agency (“CRA”) has issued several documents setting out its administrative position to assist in making a determination of whether a non resident is subject to GST. CRA’s Policy Statement P-051R2 Carrying on Business in Canada, sets out the criteria that may be considered in order to determine whether or not a non-resident is carrying on business. The CRA notes in this Policy Statement that “the mere fact that a non-resident person undertakes an activity that falls within the definition of a “business” does not mean that the business is carried on in Canada”. The CRA also states the following: “In general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Generally isolated transactions carried on in Canada as part of a business that is carried on by a non-resident person outside Canada may not result in the person being considered to be carrying on business in Canada given that the [relevant] factors will usually not be met to a sufficient degree”. The CRA also states that in order to be considered to be carrying on business, the activities in question must occur on a “regular or continuous basis”. The CRA acknowledges that “[t]here are no definitive criteria or thresholds to establish how many activities constitute “regular” or how long a period is necessary to be “continuous”. Each case must be determined based on its particular facts, including the history of the person’s activities and the person’s intention”.
In general, a non-resident person must have a significant presence in Canada to be considered to be carrying on business in Canada. Generally, isolated transactions carried on in Canada as part of a business that is carried on outside of Canada by a non-resident person may not result in the non resident being considered to be carrying on business in Canada. In determining whether or not a non resident is carrying on business in Canada, the CRA will assess a number of factors including but not limited to:
- the place where agents or employees of the non-resident are located;
- the place of delivery;
- the place of payment;
- the place where purchases are made or assets are acquired;
- the place from which transactions are solicited;
- the location of assets or an inventory of goods;
- the place where the business contracts are made;
- the location of a bank account;
- the place where the non-resident’s name and business are listed in a directory;
- the location of a branch or office;
- the place where the service is performed; and
- the place of manufacture or production.
The above factors are weighed and balanced against each other and no one factor is determinative. The importance of any one factor depends on the nature of the business activity under review and the particular facts and circumstances of a specific case. The CRA notes that the determination of whether a non-resident is carrying on business for GST purposes is not based on the “mechanical application of a numerical test”, but rather “requires judgment in establishing the importance of each factor in light of the type of supply that is being made in the context of the relevant facts”. In general, a non resident must have a significant presence in Canada to be considered to be carrying on business in Canada.
Registration and Tax Collection Obligations
For GST purposes, determining whether a non resident is “carrying on a business” is relevant to the registration and tax collection requirements of a non-resident. A non resident that is found to be carrying on business in Canada and makes taxable supplies in Canada in the course of a commercial activity must register for the GST. The non resident registrant is required to charge and remit GST on the taxable supplies it makes and may claim input tax credits in respect of same. Input tax credits are credits claimed by the GST registrant for GST that it was required to pay on purchases made in the course of the provision of the registrant’s commercial activity.
A non resident that does not have to register for GST may still choose to voluntarily register in certain circumstances. For example, a non-resident may voluntarily register if the non resident:
• is engaged in commercial activity in Canada;
• in the ordinary course of carrying on business outside of Canada, regularly solicits orders for the supply by the non-resident of goods for export to, or delivery in, Canada;
• in the ordinary course of carrying on business outside Canada, has entered into an agreement for the supply by the non resident of services to be performed in Canada; or
• in the ordinary course of carrying on business outside Canada, has entered into an agreement for the supply by the non resident of intangible personal property (e.g., a trademark, copyright or patent), to be used in Canada or that relates to real property situated in Canada, goods ordinarily situated in Canada, or services to be performed in Canada.
A non resident that chooses to voluntarily register for GST may be entitled to input tax credits. In addition, voluntary registration for GST removes the risk of noncompliance if the non resident is subsequently found to have been “carrying on business” and had not been compliant with its remittance and filing obligations.
The determination of whether a non resident is carrying on business in Canada for GST purposes is increasing in its complexity based on the changing nature and the type of services being solicited and offered, the contract performance and acceptance, and the location of performance and delivery of such services. The presence or absence of a permanent establishment is not determinative of the non resident’s liability for tax. As such, non residents are cautioned that before undertaking business activities in Canada, a non resident should obtain tax advice to determine whether they are subject to Canadian income and excise taxation.
Sabina MexisDevry Smith Frank LLP, Toronto, Canada
T: +1 416-446-3348
Sabina Mexis is a Partner at Devry Smith Frank LLP, specializing in tax and estate planning for individuals and business owners. Sabina has particular expertise in cross border tax, trust and estate planning. Sabina works closely with accountants and financial advisors, to plan and implement tax minimization strategies. Sabina also advises on retirement and executive compensation, philanthropy and charitable giving, and provides tax advice to charities and not-for-profit corporations. She also represents clients in tax disputes with the Canada Revenue Agency. Sabina is a frequent speaker at tax conferences and has written tax articles for numerous professional publications.
Published: May 2017 l Photo: diegograndi - Fotolia.com