Far Eastern Airlines is a company incorporated in Korea in 1974. Its general manager and other active officers of the company are resident in Korea and have their offices there. The directors and corporate officers of the company live in Korea as well.
During the year in question, its sole business was operating an international airline which had no landing rights in Canada. However, in that year it had raised capital on the Canadian market for its international operations by selling an issue of its stock through an investment dealer in Vancouver. The vice-president-finance of the company, who believed the stock issue would sell better in Canada, travelled from the head office in Korea to Vancouver to instruct the investment dealer.
The stock issue was highly successful and the proceeds of the issue were accumulated in a bank account in Vancouver. During the several months in the year in question when these funds were being accumulated, the company became aware of an opportunity to purchase a vast quantity of aviation fuel at a very low price. A purchasing agent was dispatched from the head office in Korea to Canada to complete the purchase using some of the funds accumulated from the stock issue. The fuel was stored in Canada temporarily in rented facilities pending shipment to San Francisco, where it could be used by aircraft landing there. Subsequently, the company was unable to make suitable arrangements for shipment. The fuel was sold to a Canadian buyer at a considerable profit. All contracts involved in the purchase and sale transactions were drawn up by a Canadian lawyer under the direction of the purchasing agent who operated from a hotel room in Vancouver during the period of the transactions.
REQUIRED
Prepare a memo for the tax person in your firm who will advise Far Eastern Airlines on the income tax consequences of these facts. Evaluate in detail the alternatives in the residence issue as they relate to this fact situation. Discuss each possible degree of residence and its tax consequences. State your conclusions on the case after considering the relevant international tax agreement and after appropriately weighing the significance of the facts considered.