8 October 2002 External T.I. 2002-0139335 - TAX. INCOME EARNED IN PROVINCE

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 CCRA.

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

Principal Issues: Whether the decision in Lerric Investments Corp. v. The Queen, 2001, DTC 5169 (FCA) or revised IT-73R6 affects the allocation of taxable income earned in a province by a corporation that is a participant in a joint venture

Position: No

Reasons: The Federal Court of Appeal concluded in Lerric Investments that no joint venturer individually employs the joint venture employees or portions of those employees for the purpose of the "more than five full-time employees" test in the definition of "specified investment business" in subsection 125(7) of the Act. However, the Court confirmed that a joint venturer is responsible for a percentage of each employee's wages. Therefore, the aggregate of salaries/wages paid in the year by the corporation to employees of the joint venture must be considered for the purposes of the allocation of taxable income among provinces as provided in Part IV of the regulations.

XXXXXXXXXX 2002-013933
Shaun Harkin, CMA
October 8, 2002

Dear XXXXXXXXXX:

Re: Taxable Income Earned in a Province by a Participant in a Joint Venture

This is in reply to your email of May 8, 2002 and further to our telephone conversation (XXXXXXXXXX/Harkin) of July 10, 2002 wherein you enquired if the Federal Court of Appeal decision in Lerric Investments Corp. v. The Queen, 2001 DTC 5169 or the revisions to Interpretation Bulletin IT-73R5 as reflected in Interpretation Bulletin IT-73R6 affect the allocation of taxable income earned in a province by a corporation that is a participant in a joint venture.

In particular you ask, when a corporation is involved in a joint venture and that corporation carries on business through a permanent establishment in more than one province:

1. Has the calculation in subparagraph 402(3)(a)(ii) of the Income Tax Regulations (the "Regulations") ceased to be applicable due to the decision in Lerric Investments or as a result of revisions to Interpretation Bulletin IT-73R5 as reflected in Interpretation Bulletin IT-73R6?

2. Has the decision in Lerric Investments or the revisions to Interpretation Bulletin IT-73R5 as reflected in Interpretation Bulletin IT-73R6 affected the calculation in subparagraph 402(3)(a)(i) of the Regulations?

Our Comments

Subsection 402(3) of the Regulations provides rules for determining the portion of taxable income earned in a province by a corporation that has a permanent establishment in more than one province. Where a corporation has a permanent establishment in a particular province, the corporation's taxable income for the year is generally allocated to the province on the basis of gross revenues for the year attributable to the permanent establishment in the province and salaries and wages paid in the year to employees of the permanent establishment (subparagraph 402(3)(a)(ii) of the Regulations).

The Federal Court of Appeal concluded in Lerric Investments that no joint venturer individually employs the joint venture employees or portions of those employees for the purpose of the "more than five full-time employees" test in the definition of "specified investment business" in subsection 125(7) of the Income Tax Act. However, the Court also concluded that a participant in a joint venture is responsible for a portion of each employee's wages in accordance with the joint venture agreement. Accordingly, in determining its "income earned in the year in a province" under Part IV of the Regulations, a corporation involved in a joint venture would include in the calculation set out in subparagraph 402(3)(a)(ii) of the Regulations its share of the salaries and wages of the joint venture employees that are paid by the corporation.

The decision in Lerric Investments does not address the allocation of gross revenues attributable to a permanent establishment and, therefore, should not affect the determination of gross revenues earned through a joint venture for the purpose of subparagraph 402(3)(a)(i) of the Regulations.

Interpretation Bulletin IT-73R6

Paragraph 17 of Interpretation Bulletin IT-73R6, dated March 25, 2002, sets out CCRA's position on the application of the "more than five full-time employees" test as it applies to a corporation participating in a joint venture. This paragraph confirms that the CCRA will apply this test in accordance with the decision in Lerric Investments. It was not intended to modify CCRA's views on the application of Part IV of the Regulations.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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