15 March 1999 External T.I. 9829415 - PART IV OF THE INCOME TAX REGULATIONS

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: Confirmation requested, with respect to the participants in the XXXXXXXXXX , as to the application of certain of the rules contained in Part IV of the Regulations.

Position: Where identifiable taxpayers are seeking confirmation as to the income tax consequences of proposed transactions seriously contemplated, they should submit a written request for an advance income tax ruling. However, certain general comments were provided.

Reasons: Consistent with the Department’s position as reflected in Information Circular IC 70-6R3.

982941
XXXXXXXXXX A.A. Cameron
(613) 957-8975
March 15, 1999

Dear Sirs:

Re: Part IV of the Income Tax Regulations (the “Regulations”)

We are writing further to a letter received from XXXXXXXXXX, submitted on behalf of the participants in the XXXXXXXXXX (the “Project”), requesting that we provide confirmation to you with regard, essentially, to the application in respect of the Project of certain of the rules contained in Part IV of the Regulations.

As discussed in a conference telephone call of March 12, 1999, where identifiable taxpayers wish to obtain confirmation as to the income tax consequences of proposed transactions which they are seriously contemplating, they should submit a written request for an advance income tax ruling in accordance with Information Circular 70-6R3 ("IC 70-6R3") dated December 30, 1996 and issued by Revenue Canada (a copy of same is enclosed for your ease of reference). Nevertheless, we can provide you with the following general comments with respect to the application of Part IV of the Regulations.

The rules contained in Part IV of the Regulations relate to the determination of the amount of a corporation’s “taxable income earned in the year in a province” for purposes of the section 124 of the Income Tax Act (the “Act”).

XXXXXXXXXX

Where in a taxation year a corporation has a permanent establishment (within the meaning assigned that term in subsection 400(2) of the Regulations; a “PE”) in a province and a PE outside that province, the rules contained in subsection 402(3) of the Regulations will, generally, deem an amount of the corporation’s taxable income to have been earned in the year in the province based upon a formula. (Part IV of the Regulations contains certain provisions which may override or modify this determination, e.g., section 403 of the Regulations with respect to insurance corporations or subsection 402(4.1) of the Regulations which applies in certain circumstances where the corporation has a PE in another country.) Unless the gross revenue of the corporation for the year is nil, a component of this formula is the “gross revenue for the year reasonably attributable to the permanent establishment in the province” as determined under the rules contained in subsection 402(4) of the Regulations.

Paragraphs (d) through (j) of subsection 402(4) of the Regulations contain rules which apply in certain specific situations, i.e., paragraphs (d) to (f) apply in certain circumstances where a customer to whom merchandise is sold instructs that shipment be made to some other person; paragraphs (g) and (h) apply in certain circumstances where the gross revenue is derived from services rendered; and paragraphs (i) and (j) apply where the gross revenue relates to certain circumstances concerning, respectively, standing timber or leasing land.

Where the situation is not one to which the rules contained in paragraphs (d) through (j) of subsection 402(4) of the Regulations apply, the rules contained in paragraphs (a) to (c) of that subsection require a determination of “the destination of a shipment of merchandise to a customer to whom the merchandise is sold” (with the rules contained in paragraphs (b) and (c) requiring consideration of whether certain additional circumstances, specified in those provisions, are present). Neither the Act nor the Regulations contains a definition in respect of this phrase.

The Department’s view as to the meaning to be assigned the phrase “the destination of a shipment of merchandise to a customer to whom the merchandise is sold”, remains as reflected in a response to question number 13, concerning the determination of “destination” for purposes of paragraph 402(4)(a) of the Regulations, at the 1995 Canadian Petroleum Tax Society Annual Meeting (a copy of this question and the response provided is enclosed). It was indicated in that response, in part, that:

...the ordinary meaning of the Regulation must govern, requiring us to consider the merits of each case, including the documentation between the parties relating to the transactions. In other words, the facts will determine the destination of the merchandise. While the passage of title or risk may be factors which should be considered, they may not be determinant of the destination of a shipment of merchandise.

As such, the determination of “the destination of a shipment of merchandise to a customer to whom the merchandise is sold” must be made based upon the facts of the particular situation, having reference to the agreements, documents, etc., relevant to that situation. However, factors which may be relevant in determining whether a particular location could constitute such a “destination” would include:

- ability to identify, at or before that location, the relevant “merchandise” as well as the “vendor” and “purchaser” thereof, e.g., such merchandise can be specifically described or measured and such vendor and purchaser, while not necessarily dealing at arm’s length for purposes of the Act, are separate legal entities with neither being the agent or nominee of the other

- a bona fide sale, at fair market value, between such vendor and purchaser must otherwise take place at or before that location, e.g., there will be no unfulfilled conditions which would prevent the sale from having occurred

- all of the arrangements relating to the sale of the merchandise are consistent with normal commercial practices

- legal title to the merchandise passes from the vendor to the purchaser at the time of the sale

- the relevant documents, e.g., bill of sale, bill of lading, sales agreements, etc., provide that the merchandise is to be delivered f.o.b. that location with payment due, and the purchaser being responsible for insuring the merchandise, upon such delivery

- the purchaser, rather than the vendor, is responsible for making all arrangements relating to the transportation or delivery of the merchandise after acquiring same at that location and the vendor would not have directed that the merchandise be shipped to any other location

- the documentation for the sale to which the vendor is a party, including agreements, bill of sale, bill of lading, etc., will not refer to a location, to which the merchandise is to be shipped, beyond that location

As noted above, this list is not exhaustive and other factors may be relevant depending upon the facts of a particular situation.

This opinion should not be construed as an advance income tax ruling and is not binding on the Department. Our practise is to make this specific disclaimer in all instances in which we provide an opinion. We refer you in this respect to paragraph 22 of Information Circular 70-6R3.

Yours truly,

Roy Shultis
Director General
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch