Non-Resident Funds Engaging Canadian Service Providers

This article was originally published in Blakes Bulletin on Cross-Border Taxation May 2005

Article by Kenneth Snider, ©2005, Blake, Cassels & Graydon LLP

Non-Canadian investment funds (a Fund) routinely engage Canadian residents to provide a broad spectrum of investment-related services ranging from administrative to advisory and portfolio management.

There was a concern that a Fund (or its members) might be treated as "carrying on business" in Canada for purposes of the Canadian Income Tax Act (the Act) solely by reason of engaging a Canadian service provider (CSP). This would result in the Fund or its members becoming subject to Canadian income tax subject to any treaty protection.

This concern arose because of a confluence of considerations. There is not a bright line test in the case law distinguishing gains on the sale of securities held in the course of carrying on a business which are treated as fully taxable as opposed to securities held as capital property, only one-half