No secondary adjustment should be made for Part XIII purposes where there is a downward s. 247(2) adjustment to a Canadian branch expense

Expenses paid by a non-resident to another are deemed to be paid by a resident Canadian for Part XIII purposes if they are deductible in computing the taxable (non-Treaty-protected) income of the payor from a Canadian branch business.  If CRA applies s. 247(2) to reduce the deductible expense, the Directorate does not consider that there should be a secondary adjustment under s. 247(12) so as to impose Part XIII tax on the adjustment amount – so that the effect of the adjustment is to reduce any applicable Part XIII tax.

The Directorate notes that this result makes sense as the usual effect of the adjustment would be to produce an off-setting increase in Part XIV tax on that amount.

Neal Armstrong.  Summary of 19 November 2014 Memo 2014-0530911I7 F under s. 247(12).