12 July 2010 External T.I. 2004-0073371E5 - Provincial Income Allocation - Individuals

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.

SUBJECT: Provincial Income Allocation - Individuals

Principal Issues: How does Part XXVI of the Regulations apply to an individual who is a member of more than one partnership?

Position: See response

Reasons: See response

XXXXXXXXXX
									2004-007337
									A. Seidel
									(613) 957-2058
July 12, 2010 

Dear XXXXXXXXXX :

Re: Provincial Income Allocation

This is in reply to your letter wherein you requested our views with respect to the determination of the income earned in a province by a non-resident individual in the circumstances described below.

You describe a hypothetical situation where a non-resident individual ("Mr. X") is a member of two partnerships ("Partnership A" and "Partnership B"). Partnership A carries on its business activities through a permanent establishment, as defined in subsection 2600(2) of the Income Tax Regulations (the "Regulations"), in Ontario and Partnership B carries on its business activities through permanent establishments in two provinces (Ontario and Manitoba). Neither Partnership A nor Partnership B pays any salary or wages, or any fees described in subsection 2603(5) of the Regulations.

Issues

(1) How does Mr. X compute his income earned in a taxation year in a province for the purposes of section 120 of the Income Tax Act (the "Act")?

(2) If Mr. X has a loss from Partnership B, is Mr. X's share of the loss deducted from his share of his income from Partnership A?

Our Comments

It is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to provide the following general comments with respect to the hypothetical situation described above.

A. Non-resident Individual's Tax Liability under Part I of the Act

An individual who, at no time in a taxation year, is resident in Canada is subject to federal income tax on his or her taxable income earned in Canada for the year, as computed under Division D of Part I of the Act. The individual is also required to pay an additional federal income tax on the individual's income for the year not earned in a province. For these purposes, the "individual's income for the year" is defined in paragraph 120(3)(b) of the Act to mean the individual's taxable income earned in Canada determined without reference to paragraphs 115(1)(d) to (f). The determination of the non-resident individual's income for the year in a province is made under Part XXVI of the Regulations.

B. Income Earned in a Year in a Province - Part XXVI

Section 2605 of the Regulations provides that where an individual carries on more than one business, the provisions of sections 2603 and 2604 shall be applied in respect of each business and the amount of income earned in a year in a particular province is the aggregate of the amounts so determined.

In the circumstances described in your letter, subsection 2605 requires that sections 2603 and 2604 apply separately to each of Partnership A and Partnership B. Pursuant to section 2603, all the income from Partnership A will be considered to be earned in Ontario.

Where an individual carries on business through a permanent establishment in more than one province, as is the case with Partnership B, subsection 2603(3) of the Regulations allocates the individual's income among the relevant provinces on the basis of the gross revenue reasonably attributable to each permanent establishment and any salary and wages paid to employees of each permanent establishment. Where an individual carries on business through a partnership that carries on business through a permanent establishment in more than one province, subsection 2603(3) of the Regulations would apply to allocate the member's share of the partnership's income among the relevant provinces on the same basis, gross revenue reasonably attributable to each permanent establishment and any salary and wages paid to employees of each permanent establishment. In this situation, it is our view that the gross revenue and salary and wages would be computed as if the partnership were a separate person and then attributed to each partner consistent with their share of the partnership's income or loss.

Where, as in the circumstances described above, an individual carries on business through a partnership and the partnership carries on business through a permanent establishment in more than one province but does not pay any salary or wages, it is our view that the allocation of income between the provinces would be determined solely by reference to gross revenues.

With regard to your question regarding the treatment of losses, assume, for example, that Mr. X's share of Partnership A's income is $100 (through a permanent establishment in Ontario) and Mr. X's share of Partnership B's loss is $50. In these circumstances, all of Mr. X's income would be allocable to a province, such that Mr. X would not be subject to the additional tax imposed under subsection 120(1).

To determine the portion of Mr. X's income that is subject to tax in Ontario, we note that the Ontario Income Tax Act (R.S.O. 1990) (the "OITA") provides that the tax payable by an individual for a taxation year is computed using the individual's taxable income determined under the Act. The OITA then gives a deduction from the taxes otherwise payable for income that is earned outside of Ontario. Accordingly, in the situation described above, Mr. X's taxable income would be $50 ($100 income from Partnership A less $50 loss from Partnership B), Mr. X would pay tax in Ontario on the $50 and, since Mr. X has no income that is earned outside of Ontario (Mr. X's loss from Partnership B does not reduce Mr. X's income earned in Ontario) there would be no reduction in the Ontario income taxes payable by Mr. X on the $50.

We trust our comments are of assistance.

Yours truly,

for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch