Principal Issues: Whether a designation of out-of-country assets by the Minister pursuant to paragraph 2400(1)(f) of the Regulations is contrary to Article VII of the Canada-US tax treaty.
Position: It depends. If the business profits attributable to a permanent establishment of a non-resident insurer as determined under Article VII of the Canada-US tax treaty are less than those determined under Canadian domestic law, the treaty will restrict Canada's right to tax to the amount determined under Article VII.
Reasons: The non-resident insurer needs to prepare a thorough functional and factual analysis to demonstrate that the business profits attributable to the permanent establishment as calculated under Article VII are less. The non-resident insurer cannot simply calculate its income under domestic law but without regard to paragraph 2400(1)(f) of the Regulations and use that amount as its business profits attributable to a permanent establishment under Article VII without any supporting functional and factual analysis.