18 April 2001 External T.I. 2001-0064665 - ALLOC. BETWEEN PROVINCES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: How to allocate corporation's gross revenue to particular provinces under Regulation 402 where it is a member of partnership(s).

Position: Determine corporation's total gross revenue for the year (including partnership portion using 402(6)), and determine portion thereof which is attributable to particular provinces using the rules in 402(4) on the basis that the corporation has a permanent establishment wherever the partnership has a PE.

Reasons: Reg 402(3), (4) and (6).

		2001-006466
XXXXXXXXXX 	B.G. Dodd
(613) 957-8954
April 18, 2001

Dear XXXXXXXXXX:

Re: Allocation of Partnership Income Between Provinces
Our Letter dated November 17, 2000 (File # 2000-005481)

We are writing further to our November 17, 2000 reply to your letter dated October 30, 2000 concerning section 402 of the Income Tax Regulations (the "Regulations").

We have been advised by our Hamilton Tax Services Office that the circumstances set out in your letter were descriptive of an actual situation and that a particular aspect thereof may not have been fully appreciated or considered in developing our reply. The purpose of this letter is to confirm our previous reply and to clarify that once a corporation's gross revenue for the year and salaries and wages paid in the year have been determined (after applying subsection 402(6) of the Regulations with respect to its partnership operations), it is our view that in determining the corporation's "gross revenue for the year reasonably attributable to a permanent establishment in a [particular] province" for purposes of the numerator in the formula in subparagraph 402(3)(a)(i) of the Regulations, the rules in subsection 402(4) of the Regulations are to be applied.

As discussed in our November 17, 2000 letter, in the example where the corporation is a partner in two partnerships, one of which has a permanent establishment in each province ("Multi-PE") and the other has a permanent establishment in only one province, province X ("Single-PE"), our view is that the corporation would have a permanent establishment in every province. As the corporation has a permanent establishment in a particular province and a permanent establishment outside that province, its taxable income earned in a year in a particular province is to be determined in accordance with subsection 402(3) of the Regulations (assuming it is not one of the specifically identified types of corporations for which Part IV of the Regulations provided specific rules). More particularly, assuming neither the corporation's gross revenue nor salaries and wages paid is nil, paragraph 402(3)(a) of the Regulations is the relevant provision, with subparagraph (i) thereof providing a formula, part of which entails the use of the amount of the corporation's "gross revenue for the year reasonably attributable" to the permanent establishment in the particular province. As set out in its preamble, subsection 402(4) of the Regulations provides rules for the specific purpose of determining the corporation's "gross revenue for the year reasonably attributable" to a permanent establishment in the particular province.

Where, for example, Single-PE sells and ships certain merchandise to Multi-PE, the destination of which is Multi-PE's offices in province Y, it is our view that pursuant to paragraph 402(4)(a) of the Regulations, the corporation's gross revenue therefrom (being the related portion of its share of the gross revenue of Single-PE determined under subsection 402(6) of the Regulations) will be attributed to the corporation's permanent establishment in province Y. This is so notwithstanding that the sale was made by Single-PE, which only has a permanent establishment in province X, because the corporation also has a permanent establishment in province Y (by virtue of its being a member of Multi-PE). Similarly, the corporation's gross revenue reasonably attributable to the various provinces with respect to sales by Multi-PE would be determined under the rules in subsection 402(4) of the Regulations.

This aspect was not the main focus in our previous reply and for purposes of the discussion therein, there was an underlying assumption that the transactions took place within province X. We regret any confusion and hope this clarifies matters. A copy of this letter is being provided to officials of the Hamilton Tax Services Office.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

cc Mr. Hugh Steinbock, Large Files, Hamilton Tax Services Office

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