11 November 1994 External T.I. 9408985 - BRANCH TAX PURSUANT TO ART X, PAR. 6 OF U.S. TREATY

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.

Principales Questions:

whether Branch Tax would be calculated on a cumulative basis where par.6 of Art.X of the US-CAN. Treaty is applicable

Position Adoptée:

Treaty has precedence over 219(1)

Raisons POUR POSITION ADOPTÉE:

		October 11, 1994

	Calgary District Office	Head Office
	International Audit	Rulings Directorate
		Reorganizations and
		 Foreign Division
	Attention:  Bill Waddy	Carole Pronovost, c.a.
(613) 957-2126

		7-940898

Calculation of Branch Tax in accordance with Article X, paragraph 6 of the Canada-U.S. Convention as opposed to subsection 219(1) of Part XIV of the Income Tax Act (the "Act")

Your memorandum of December 16, 1994 to the International Tax Programs Directorate has been referred to us for reply. You asked whether the calculation of the Branch Tax base would be calculated on a cumulative basis where paragraph 6 of Article X of the Canada-U.S. Income Tax Convention (1980) (the "Treaty") is applicable notwithstanding that subsection 219(1) of the Act is intended to be an annual calculation.

In your view, paragraph 6 of Article X of the Treaty permits the Contracting State to levy Branch Tax on "earnings" which is basically a cumulative amount considering previous years. However, subsection 219(1) calculates the branch tax on an annual basis with the additions and reductions thereto relating to the year for which the calculation is being made.

Our Views

We agree with your view that paragraph 6 of Article X of the Treaty permits the Contracting State to levy Branch Tax on "earnings", which is defined as the excess of the business profits in a year and previous years over certain amounts including business losses and taxes computed in same fashion. Where that paragraph is applicable, it has precedence over subsection 219(1) of the Act. Consequently, the Branch Tax pursuant to section 219 should not exceed 10% of cumulative untaxed "earnings" as defined in paragraph 6 of Article X of the Treaty where this paragraph is applicable. In other words, the Treaty provision has the effect of imposing a ceiling on the amount of Branch Tax that can be imposed. In our opinion, the Branch Tax calculations will involve two steps:

a)Calculation of Branch tax in accordance with Part XIV.

b)Calculation of upper limit in accordance with paragraph 6 of Article X.

The amount calculated under a) could not exceed the amount under b).

It continues to be our position (as stated in the August 14, 1987, memo to the Calgary D.O.), that the calculation of Branch tax base in subsection 219(1) of the Act (amount calculated under a) above) is an annual calculation with the additions and reductions thereto relating to the year for which the calculation is being made. In other words, it is our opinion that the existing words in paragraph 219(1)(a.3) and (j) of the Act limit the addition and reduction applicable in computing the branch tax base for a year, to that year's resource allowance and that year's non-deductible Crown charges, respectively.

We hope these comments are of assistance.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Policy and Legislation Branch