2 July 1998 External T.I. 9807035 - INTERPROVINCIAL ALLOCATION OF INCOME

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.

XXXXXXXXXX 980703
D. Boychuk

Attention: XXXXXXXXXX

July 2, 1998

Dear Sirs:

Re: Allocation of Income

We are writing in response to your letter of March 10, 1998 wherein you requested our views on the application of section 400 of the Income Tax Regulations (the “Regulations”) to the facts described below.

1. The taxpayer is a “taxable Canadian corporation” within the meaning of subsection 89(1) of the Income Tax Act (the “Act”). The taxpayer is engaged in the business of providing investment advice and money management services.

2. The taxpayer has “permanent establishments” in Quebec, Ontario and British Columbia within the meaning of subsection 400(2) of the Regulations. The taxpayer’s head office is in the province of Quebec.

3. The taxpayer’s clients consist of mutual funds, institutional pension and savings plans, municipalities, universities and charitable foundations as well as individuals.

4. The taxpayer receives fees for services rendered based primarily on assets under management.

5. The taxpayer employs portfolio managers who are principally located at the head office in Quebec. The portfolio managers are the only authorized persons to make investment decisions (buying and selling marketable securities) and to provide investment advice to the taxpayer’s clients.

6. The personnel at the branch offices provide administrative and marketing support to the head office, including meeting with clients, providing input to assist the client in formulating investment policy and preparing monthly reports (“ancillary services”).

You have asked for confirmation that, in allocating the taxpayer’s taxable income, the taxpayer’s gross revenue will be attributable to the permanent establishment where the portfolio managers are located. In this respect, you have advised us that the taxpayer’s clients are only seeking the investment and advisory services provided by the portfolio managers and that the branch offices do not generate any direct revenue.

OUR COMMENTS

A determination of the proper allocation of income will depend upon a complete analysis of all the facts, including the specific terms of the client contracts, the nature of the services provided and the relevance of the particular services provided by each permanent establishment to the taxpayer’s overall operation. We are, however, able to provide the following general comments.

The taxable income earned by the taxpayer must be allocated among the provinces in which the taxpayer maintains a permanent establishment in accordance with the rules set out in Part IV of the Regulations. In determining the gross revenue reasonably attributable to a permanent establishment in a province, paragraph 402(4)(g) of the Regulations requires the gross revenue derived from services rendered in a particular province to be attributed to the permanent establishment in the province.

In allocating the gross revenue from its services, the taxpayer must determine the place where the duties which generate those revenues are performed. In our view, the services which generate the taxpayer’s gross revenues are a composite of the services rendered by the portfolio managers and the ancillary services. Consequently, it is reasonable to assume that some portion of the gross revenues earned by the taxpayer are derived from the ancillary services. Accordingly, the taxpayer should attribute a portion of its gross revenues to each permanent establishment in recognition of the value of the ancillary services provided by that establishment.

We trust that our comments will be of assistance.

The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
3

4

.../cont'd