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:
Meaning of the "destination of a shipment of merchandise" for purposes of subsection 402(4) of the Regulations.
Position:
It is a question of fact.
Reasons:
The Department does not take the position that the "destination" is automatically the location where title passes.
963064
XXXXXXXXXX Jim Wilson
March 26, 1997
Dear Sirs:
Re: Taxable Income Earned in a Province by a Corporation
This is in reply to your letter dated September 6, 1996 in which you requested our opinion regarding the allocation of income to a province. More specifically, you have described a situation where a corporation has a permanent establishment ("PE") located in two provinces and you wish to know, with respect to subsection 402(4) of the Income Tax Regulations (the "Regulations") to which PE the gross revenue earned by the corporation with respect to a sale of merchandise (the "product") should be allocated. The situation you have described can be summarized as follows.
1.A foreign customer with no Canadian office places an order for a product.
2.The product is manufactured at a PE of the corporation in Province A.
3.The product is then transported to a PE (ie. the shipping office) of the corporation in Province B.
4.The product is then transported from the PE in Province B to a freight forwarder (eg. shipping company) located in Province B, contracted by the foreign customer, to deliver the product to the foreign destination which is the residence of the customer that placed the order. While the Canadian corporation is generally aware when a product will be shipped to a foreign location, it is not necessarily certain of that fact.
5.The title to the product passes to the foreign customer when it is transferred to the freight forwarder in Province B. The contract indicates that the sale is F.O.B. at this point. Property insurance premiums are paid for by the foreign customer beginning at the point of transfer to the freight forwarder.
It is a question of fact as to the location of "the destination of a shipment of merchandise" for purposes of subsection 402(4) of the Regulations. The place where title passes in the shipping of the product may coincidentally be the "destination" of the shipment, however, this is not always the case and title passage should be considered as just one factor in determining the destination of a product.
For the purpose of paragraph 402(4)(a) of the Regulations, it has generally been the Department's view that the vendor of a product should allocate gross revenue to a particular jurisdiction if the vendor has a PE in that jurisdiction and the vendor has reasonable knowledge at the time of sale that the customer will consume or resell the goods in that jurisdiction. However, in the situation described above where the vendor has a contract with a foreign customer for the delivery of a product to a freight forwarder located in Province B, and the vendor knows with some reasonable degree of certainty that the product will be ultimately consumed or re-sold by the foreign customer in his foreign jurisdiction, then the location of the freight forwarder (i.e. Province B) would not be relevant and the "destination of a shipment of merchandise" would be the foreign jurisdiction. In such a case, subparagraph 402(4)(c)(i) of the Regulations would apply to allocate the gross revenue to the vendor's PE in Province A since the vendor did not have a PE in that foreign jurisdiction.
The Department would generally not be able to provide a definitive opinion with respect to whether the vendor had such "reasonable knowledge" without having reviewed all the relevant facts and documentation of a particular case. However, based on our telephone conversation (XXXXXXXXXX/Wilson) on March 25, 1997, it would appear that, regardless that the sales contracts or the shipping instructions are not specific as to the ultimate destination of the product sold, in your situation the products (i.e. XXXXXXXXXX) being sold are used in XXXXXXXXXX and the foreign customer is the manufacturer of those XXXXXXXXXX. Therefore, under these circumstances, it would appear that you would have a reasonable knowledge as to the final "destination of a shipment of merchandise".
We agree with your analysis of paragraph 402(4)(f) with respect to this fact scenario.
The foregoing comments represent our general views with respect to the subject matter of your letter. As indicated in paragraph 22 of Information Circular 70-6R3, this is not an advance income tax ruling and is therefore not binding on Revenue Canada.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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