27 June 2006 External T.I. 2004-0106031E5 - Taxable Income Allocation Rules

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: How paragraph 402(4)(j) and subsection 402(5) of the Regulations are to be applied in computing the taxable income of a corporation in a province, where the corporation has earned rental revenue from leasing of real property that is not connected with the principal business operations of the corporation.

Position: If the land is not used in connection with the principal business operations of the corporation, the rentals therefrom would be excluded in computing the gross revenue reasonably attributable to the PE in the province the land is situate. Such rentals would also not be viewed as reasonably attributable to PE in another province.

Reasons: Pursuant to subsection 402(3) of the Regulations, where a corporation has a PE in a province and a PE outside of the province, its taxable income earned in the province is deemed to be an amount computed with reference to the gross revenue for the year that is reasonably attributable to the PE in the province. Pursuant to paragraph 402(4)(j), the "gross revenue" that is reasonably attributable to a PE in a province includes gross revenue which arises from leasing land owned by the taxpayer that is situated in that province, and included in computing its income under Part I of the Act. Pursuant to subsection 402(5), "gross revenue" for purposes of subsection 402(3) does not include ..... rentals ..... from property that is not used in connection with the principal business operations of the corporation".

								D Tiu
XXXXXXXXXX 							(613) 957-8961
								2004-010603
June 27, 2006

Dear XXXXXXXXXX:

Re: Taxable Income Allocation Rules in respect of Rental Revenue from Leasing Land not connected to the Principal Business of a Corporation

We are writing in response to your November 25, 2004 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX/Tiu). We apologize for our delay in replying. You inquired as to how paragraph 402(4)(j) and subsection 402(5) of the Income Tax Regulations ("the Regulations") are to be applied in computing the taxable income of a corporation in a province, where the corporation has earned rental revenue from leasing of real property that is not connected with the principal business operations of the corporation.

For the purpose of your inquiry, you have described a corporation that is in the business of XXXXXXXXXX in Saskatchewan. The corporation also owns vacant land in Manitoba. The vacant land is currently leased out to an arms-length third party under a "triple net lease" arrangement. By virtue of paragraph 400(2)(d) of the Regulations, you believe that the corporation has a permanent establishment ("PE") in Manitoba. However, you advise that the leasing of the land is not connected to the principal business operations of the corporation. Therefore, your view is that the related rental revenue from leasing the land would, pursuant to subsection 402(5) of the Regulations, be excluded from the corporation's "gross revenue" under subsection 402(3) of the Regulations for purposes of computing its taxable income in either Manitoba or Saskatchewan.

The particular situation in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide the following general comments, which may be of assistance.

Pursuant to subsection 402(3) of the Regulations, where a corporation has a PE in a province and a PE outside of the province, its taxable income earned in the province is deemed to be an amount computed with reference to the gross revenue for the year that is reasonably attributable to the PE in the province. Pursuant to paragraph 402(4)(j) of the Regulations, the "gross revenue" that is reasonably attributable to a PE in a province includes gross revenue which arises from leasing land owned by the taxpayer that is situated in that province, and included in computing its income under Part I of the Act. Pursuant to subsection 402(5) of the Regulations, "gross revenue" for purposes of subsection 402(3) does not include ..... rentals ..... from property that is not used in connection with the principal business operations of the corporation".

It is a question of fact whether a particular property is used in connection with the principal business operations of a corporation. If, as you advise, the land in Manitoba is not used in connection with the principal business operations of the corporation, the rentals therefrom would be excluded in computing the gross revenue reasonably attributable to the PE in Manitoba. We also agree that such rentals would not be viewed as reasonably attributable to the PE in Saskatchewan.

These comments represent our opinions of the law as it applies generally, and as indicated in paragraph 21 of Information Circular 70-6R5 are not binding on the Department. Nevertheless, we hope that our comments will be of assistance to you.

Yours truly,

Robin Maley
Section Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch