7 May 1991 Income Tax Severed Letter - Tax on Large Corporations

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.

Dear Sirs:

Re: Tax on Large Corporations

This is in response to your letter of February 15, 1991 in which you requested our views on the interpretation of subsection 181.2(1) of the Income Tax Act (the "Act") and the related Income Tax Regulations ("the Regulations"). In particular, you asked whether the deeming provision in the postamble of section 8600 of the Regulations, which reads, in part, ". . . where a corporation's taxable income for a taxation year is nil, it shall, for the purposes of this section, be deemed to have a taxable income for that year of $1,000" applies to both items C and B or only item C in the algebraic formula in section 8600 of the Regulations.

In our opinion, the deeming provision applies, conceptually, to all of section 8600 of the Regulations and not to a specific item or items in the algebraic formula. If a corporation's taxable income for a taxation year is nil, the deeming provision in the postamble applies to deem the corporation to have taxable income of $1,000 for that year. That $1,000 amount is then allocated in accordance with the rules in item B of the formula and, specifically, in accordance with Part IV of the Regulations. The mechanics of the allocation are best illustrated by the following examples:

• 1. Aco has a permanent establishment in a province in Canada only. It has no taxable income.

Pursuant to the postamble to section 8600 of the Regulations, Aco has taxable income for that year of $1,000. Subsection 402(1) of the Regulations states that where a corporation has a permanent establishment in only one province, the whole of its taxable income shall be deemed to be earned in that province. Accordingly, the amount for purposes of item B of section 8600 of the Regulations determined in accordance with Part IV of the Regulations, is $1,000.

• 2. Aco has no permanent establishment in Canada. Aco has no taxable income.

Pursuant to the postamble to section 8600 of the Regulations, Aco has taxable income of $1,000. Subsection 402(2) of the Regulations states that where a corporation has no permanent establishment in a province, no part of the taxable income shall be deemed to be earned therein. Therefore, as no portion of the $1,000 taxable income would be considered to be earned in a province, the amount determined pursuant to Part IV of the Regulations is 0 for the purposes of item B of section 8600 of the Regulations.

• 3. Aco has a permanent establishment in Canada and a permanent establishment in the United States. Neither permanent establishment has taxable income. Gross revenue and salaries and wages paid in the year are attributable to each permanent establishment in equal proportions.

Pursuant to the postamble to section 8600 of the Regulations, Aco has taxable income of $1,000. Pursuant to paragraph 402(3)(a) of the Regulations, Aco's taxable income earned in a year in a province is determined on a proportional basis with reference to gross revenues reasonably attributable to, and salaries and wages paid to the employees of, the permanent establishment in the province. For purposes of item B of section 8600 of the Regulations, the proportion of its taxable income of $1,000 (by virtue of the postamble to section 8600 of the Regulations) attributable to a permanent establishment in a province would be half of the taxable income or $500.

In each of the foregoing examples, the amount for the purposes of item C of section 8600 of the Regulations would be $1,000.

While we trust the foregoing comments are of assistance, they do not constitute an advance income tax ruling and, therefore, are not binding on Revenue Canada, Taxation, in respect of a specific situation.