Where a non-resident of Canada is determined to be carrying on business in Canada, the non-resident will be required to file Canadian income tax returns and pay Canadian income tax on any taxable income they earned in Canada. But, a non-resident individual can earn property income such as interest or rent without the same filing requirements, though Part XIII withholding tax would typically apply. In the case of rent, the withholding tax applies on the gross rent earned unless the individual makes an election under section 216 of the Canadian Income Tax Act (the “Tax Act”), in which case the individual must file a T1159 income tax return for electing under section 216 and pay tax on the net rent (the gross rent minus any expenses) at Canadian income tax rates. Once the s.216 election is made and the return is filed, the CRA will refund any difference between the tax withheld and the final amount payable. A non-resident can also apply to have tax withheld only on the net rent rather than the gross rent by filing a NR6 form, though if that is approved, the individual must file a T1159 return and will be reassessed for the gross rental withholding if the return is not filed on time. Unfortunately, it can be unclear as to whether an individual’s activities constitute a business, and it can be equally unclear as to whether the business might be considered to be carried on in Canada. This is the case because the Tax Act does not explicitly define the word business, nor does it define what constitutes carrying on business in Canada. If you are uncertain about your Canadian tax obligations call one of our top Canadian tax lawyers and learn if your Canadian activities fall under these provisions.
Definition of Business
There is no complete definition of business in the Tax Act; however, subsection 248(1) of the Tax Act reads, “business includes a profession, calling, trade, manufacture or undertaking of any kind whatever and... an adventure or concern in the nature of trade but does not include an office or employment.” So, while the Tax Act provides examples of activities that fall under the concept of business, this does not provide much guidance for activities which are not explicitly described.
As such, tax case law and secondary sources must be examined to gain more clarity. In his Analysis of the Notice of Business, François Auger indicates that the common law concept of business implies that an activity must be commercial, organized, and established to carry out a particular project or produce a product or provide a service for the purpose of profit. Tax case law tends to agree with this statement and Monet J. in No.24956 indicates that at least 3 elements have to be met for an activity to qualify as a business: 1) the occupation of time, attention and labour; 2) the incurring of liabilities to other persons; and 3) the purpose of a livelihood or profit. When considering whether time, attention and labour have been devoted to an activity, it should be understood that this is not limited only to yourself, but can also include any employees or servants that act to operate the business. For example, this element may not be met where an individual is only financially interested, such as passively earning income from interest, dividends, or rent. Furthermore, the activities must be such that the individual incurs obligations or liabilities. Typically this element contemplates the making of contracts with other persons for sales, services, or whatever other activity is being undertaken – if activities are being undertaken without actual obligations or liabilities. Finally, the activities must be for the purpose of a livelihood or profit, meaning that the intention in undertaking the activities is for profit rather than a hobby.
Carrying on Business in Canada
Where a non-resident is found to be carrying on business in Canada, that person must then file a Canadian tax return reporting and paying tax on any taxable income that he earned in Canada. As such, the first step is to determine whether the activities constitute business at all, and if so, determine whether the business was carried on in Canada. As stated above, the Tax Act does not speak as to what qualifies as carrying on business in Canada, but the common law considers this to be a question of fact to be determined on the basis of all the facts and circumstances of each case. In order to do so, the two different common law tests were created. The first test considers where a contract is made to be where the business was carried on. However, this test is easily manipulated, as contracts can, and many do, explicitly specify in which country the contract is deemed to have been made. The second test takes a more holistic approach and considers various factors such as where materials are purchased, where inventory is located, where the service or good is provided, where orders are solicited, and where delivery and payment occur when coming to a determination of business location. Since this test considers a wide variety of factors and no particular factor is always more important than the others, it can be difficult to identify whether one might be considered to be carrying on business in Canada or not, particularly for borderline situations. Our experienced and knowledgeable Canadian tax lawyers can go through all the facts with you and help make the determination.
There can be a fine line between income from property, which does not require a non-resident to file a Canadian income tax return, and income from a business carried on in Canada, which does require a non-resident to file a Canadian income tax return. However, in some cases such as with rental income, it can and often is beneficial to make a s.216 election and file a non resident Canadian income tax return. Furthermore, even if it is clear that the income is not from property, it can be difficult to determine whether the business was carried on in Canada or not. Yet, these determinations can have a huge affect on an individual’s Canadian tax obligations and getting it wrong could carry big tax consequences. If there is any doubt as to what category one’s activities fall under, it is imperative to seek professional legal advice to mitigate or avoid any problems with the CRA.