23 August 1982 Income Tax Severed Letter 5-4155 - [820823]

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.

AUG 23 1982 Ms. E. Mikhail (613) 995-1787

Dear Sirs:

This is in reply to your letter of June 9, 1982 in which you enquired about the interpretation of Article VII of the Canada-United Kingdom Income Tax Convention (1978).

The situation described by you is as follows:

A U.K. corporation is carrying on business in various countries throughout the world, including in Canada through a permanent establishment located here. Certain technical and administrative support functions that are essential to the operation of the Canadian branch are provided by the New York branch of the U.K. corporation.

In computing the income of the U.K. corporation from carrying on business in Canada for the purposes of section 115 of the Canadian Income Tax Act, it is necessary to deduct the cost incurred by the New York branch in providing the above service to the Canadian branch. In this regard, Regulation 1102(3) of the Income Tax Act precludes the U.K. corporation from claiming capital cost allowance in respect of depreciable property owned by it that is situated outside Canada even though the property is used to earn income from a business. You feel- that this Regulation contravenes the provisions of Article VII of the Canada-U.K. Tax Convention (1978), specifically paragraph 2. In this regard you asked whether the U.K. corporation could deduct in computing its business profits of the Canadian enterprise in respect of depreciable property that is situated in New York but used for the direct benefit of the Canadian enterprise either a fair market value rental or make a reasonable allocation of the total economic depreciation calculated in accordance with generally accepted accounting principles.

Paragraph 3 of Article VII permits the U.K. corporation in the determination of the profits of its permanent establishment situated in Canada to deduct expenses incurred outside Canada which are incurred for the purpose of the permanent establishment in Canada. Such expenses include general administrative expenses incurred in the U.S. for the Canadian permanent establishment, as appears to be the case described by you, but are not restricted to that category. Such expenses may include a charge for the use of depreciable property owned by the U.K. corporation and located in the U.S. but used for the permanent establishment in Canada. However, such a charge in order to be deductible in computing the profit of the permanent establishment here, should not exceed that portion of the amount that would be the depreciation expense for the property calculated under generally accepted accounting principles that could reasonably be attributed to the Canadian permanent establishment.

Yours truly,

SIGNED BY.

R.J.L. READ

Director Corporate Rulings Division Legislation Branch