19 February 2014 Internal T.I. 2013-0508121I7 - Provincial Income Allocation among Joint Venturers

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.

Principal Issues: For provincial income allocation calculation purposes, how are salary and wages allocated among participants in a joint venture?

Position: It's a question of fact. It depends on the joint venture agreement.

Reasons: Where the participants agree to share legal responsibility for the salaries and wages of the employees of the joint venture, the participants would include their pro-rata share of the salary and wages in their respective provincial income allocation calculations.

February 19, 2014

Provincial Legislative Affairs HEADQUARTERS
Legislative Policy Directorate Income Tax Rulings
Legislative Policy and Regulatory Affairs Branch Directorate
Andrew Deak
Attention: Richard Aronoff
2013-050812

Provincial Income Allocation Question regarding Salaries and Wages within a Joint Venture

We are writing in response to your letter dated October 10, 2013, in which you requested our views concerning how salaries and wages are to be attributed among joint venture participants for provincial income allocation purposes.

Your letter described how, in the context of our technical interpretation letter XXXXXXXXXX, joint venture participants of a specific project were permitted, for purposes of provincial income allocation, to include their pro-rata share of the wages and salaries incurred by the operator of the joint venture in their individual provincial income allocation calculations. However, you are concerned that this may be in conflict with our technical interpretation letter E2005-0115041I7, where we stated that, while claiming their pro-rata share of wages and salaries in their computation of net income, participants in a joint venture may only include salary and wages for provincial income allocation purposes that they themselves have a legal obligation to pay.

Your letter also noted that the typical joint venture arrangement is for the participants of the joint venture to use an operator (i.e., a separate corporation) as their agent to manage the project and employ the staff rather than for one or more of the participants in the joint venture to employ staff (directly) themselves.

Our Comments

Section 402 of the Income Tax Regulations (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)).

Our letter XXXXXXXXXX dealt with a situation in which employees were paid through a "shell corporation." Our position was that the joint venture participants would be allowed to include their pro-rata share of the salaries and wages in their provincial income allocation calculation.

In Lerric Investments Corp. v. The Queen, 2001, DTC 5169 (FCA), at paragraph 20, the Federal Court of Appeal noted that it "is the co-owners or joint venturers together, but not independently, who employ the employees… They can say that, in accordance with the co-ownership or joint venture agreement, they are responsible for a percentage of each employee's wages" (our emphasis). These comments were made 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. Nonetheless, the comments highlight the relevance of a joint venture agreement in allocating responsibility for the employees' wages.

With respect to our letter E2005-0115041I7, it is important to note that our comments were made in reference to specific situations where a corporation was contributing its employees to the joint venture project. In such cases, a corporation involved in a joint venture would only include

"its share of the salaries and wages of the joint venture employees that are directly paid by the corporation to the employees of the permanent establishment in the province. Normally, that would occur where the corporation is legally responsible for paying the employee."

It is our view that whether a corporation is legally responsible for paying the employees of a joint venture will depend on the joint venture agreement in question. Where the participants agree to share legal responsibility for the salaries and wages of the employees of the joint venture, the participants would include in their respective provincial income allocation calculations their pro-rata share of the salary and wages. Thus, in such situations, our views in XXXXXXXXXX are still applicable.

Additionally, where there is a nominee corporation paying the employees of a joint venture and the legal responsibility is not shared among the joint venturers, the central pay master rules in section 402.1 of the Regulations may apply to attribute the salary and wages to the joint venturers.

We trust our comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch