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: Allocation of income from partnerships between provinces.
Position: Gross revenue and salary/wages part of formula to be based on share of partnership income/loss.
Reasons: Subsection 402(6) of the Regulations
2000-005481
XXXXXXXXXX B.G. Dodd
957-8953
Attention: XXXXXXXXXX
November 17, 2000
Dear Sirs:
Re: Allocation of Partnership Income Between Provinces
We are writing in reply to your letter dated October 30, 2000 concerning section 402 of the Income Tax Regulations (the "Regulations").
You describe a situation in which a 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 ("Single-PE"). Single-PE is a wholesaler and sells the majority of its merchandise to Multi-PE, which is a retailer. Based on your interpretation of paragraph 96(1)(a) of the Income Tax Act (the "Act"), it is your view that Single-PE, computing its income as a separate person, would allocate all of its gross income to the only province in which it has a permanent establishment, in accordance with paragraph 402(4)(b) of the Regulations. It would then be your view that to determine the corporate partner's allocation of taxable income to the provinces, Single-PE's gross revenue allocation would be added to the gross revenue allocations from Multi-PE and from the corporation itself. The resulting gross revenue in each province would be used in the calculation in subparagraph 402(3)(a)(i) of the Regulations to determine the amount of taxable income of the corporation earned in each province.
There are some aspects with which we do not agree, notably the extension of the provisions of paragraph 96(1)(a) of the Act to section 402 of the Regulations in the manner described. In this regard, it is our view that these Regulations do not apply to require a partnership to allocate gross revenue to a province and that the requirement only applies to corporations.
In terms of our general views on a situation such as that described, it is our position that each member of a partnership has a permanent establishment in the province(s) in which the partnership has a permanent establishment. Therefore, in the example cited, the corporation would have a permanent establishment in each province. Where a corporation has an amount of gross revenue and salaries and wages paid for the year, paragraph 402(3)(a) of the Regulations provides the formula for allocating the corporation's taxable income to each province in which it has a permanent establishment, which is based on the portion of the corporation's total gross revenue and salaries and wages which is attributable to each particular permanent establishment.
Subsection 402(6) of the Regulations provides, for purposes of subsection 402(3) thereof, that where part of a corporation's operations are conducted in partnership with one or more persons, the corporation's gross revenue and salaries and wages for the year include, in respect of those operations, only the portion of the partnership's gross revenue and salaries and wages which is based on the corporation's interest in the income or loss of the partnership. This would have to be determined in respect of the corporation's interest in each of the partnerships. The corporation's total gross revenue and salaries and wages so determined would then be allocated to each particular permanent establishment to which such amounts are attributable for purposes of applying the formula in paragraph 402(3)(a) of the Regulations.
Where the corporation, by virtue of its interest in Single-PE, has a permanent establishment in province X, the portion of the corporation's total gross revenue and salaries and wages included in respect of its interest in Single-PE, as determined under subsection 402(6) of the Regulations, would be attributable to that permanent establishment in province X. Added to this would, in our view, be the portion of the corporation's total gross revenue and salaries and wages included in respect of its interest in Multi-PE, as determined under subsection 402(6) of the Regulations, which is attributable to Multi-PE's permanent establishment in province X. To this would also be added the portion, if any, of the corporation's total gross revenue and salaries and wages (excluding the amounts determined in respect of the corporation's interest in Single-PE and Multi-PE as attributable to their permanent establishments in province X) which is attributable to any permanent establishment of the corporation in province X (i.e., the portion attributable to the corporation's operations in province X otherwise than through the two partnerships, if any). The total of such portions of the corporation's gross revenue and salaries and wages which are attributable to its permanent establishments in province X would constitute the numerator in the formulas in subparagraphs 402(3)(a)(i) and (ii) of the Regulations in determining the corporation's taxable income earned in the year in province X. Similar determinations would be made in respect of the corporation's interest in Multi-PE for each of the other provinces and any operations of the corporation in each other province otherwise than through Multi-PE, if any.
We hope this will be of assistance.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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