Section 219

The Directorate confirmed the position in 9408985 that in light of the branch profits limitation under Ar. X(6) of the Canada-US Treaty of 10% of cumulative untaxed "earnings," a two-step process should be followed under which branch tax is first computed in accordance with Part XIV, then the upper limit is computed under Art. X(6) which, if applicable, reduces the branch tax computed under the first step.

Regarding the effect on “earnings” under Art. X(6) where a non-resident corporation applied a loss carryback to reduce its taxable income earned in Canada in the prior year, the Directorate noted that, in contrast to the Part XIV rules, the Art. X(6) earnings for a particular year are not reduced by the carryback of losses to that year from a subsequent year, so that such loss only reduces the cumulative earnings for Art. X(6) purposes in the loss year. Furthermore, although Art. X(6)(b) contemplates the deduction of Part I federal, and provincial income tax in computing earnings, when there is a loss carryback to a prior year which reduces such taxes for that year, the impact of such tax reduction on earnings for Art. X(6) purposes should be to reduce the loss for the current year rather than to increase earnings for the prior year.

The Directorate further stated:

[T]he amount of Allowance for Investment Property in Canada claimed in the prior year and that is being added back to the branch tax base under paragraph 219(1)(g) should not be added back in the same manner in computing “earnings” under Article X(6). Instead, the amount of Allowance for Investment Property in Canada for the current year, calculated under Regulation 808, would be deducted in the “earnings” calculation in accordance with subparagraph (c) of Article X(6).

Although the reference to taxable Canadian property is to be read without reference to paragraph (a) of the definition (real property situated in Canada), real property situated in Canada that is used or held by a business carried on in Canada would also fit within paragraph (b) of the definition, so that such property would not be excluded. CRA stated:

This is consistent with the Department of Finance's Technical Notes which indicate that as a result of the restriction on the definition of taxable Canadian property under subsection 219(1.1) of the Act, only gains and losses that arise on capital property used in carrying on the non-resident corporation's business in Canada are included in the branch tax base amount.

"... Subparagraph 219(2)(b)(ii) of the Act grants tax relief to those non-resident corporations who own or rent a transmission facility in Canada and whose principal business is the provision of communication or telecommunication services to the public, generally, for compensation. In a situation where the provider of such services does not own or rent a transmission facility but instead purchases a block of capacity or time from other licensed transmitters and where the provider is subject to registration or licensing requirements under any of the above-noted statutes, it is our general view that the provider of such services is in the business of communications ... . As long as the main or chief business of a non-resident corporation is communications, the requirement of subparagraph 219(2)(b)(ii) of the Act would be met ... ."

The taxpayer (a non-resident insure) transferred its Canadian insurance branch on a rollover basis to a wholly-0wned subsidiary, did not enter any amount on line 728 of its T2 return respecting Part XIV tax payable and did not file any specific Part XIV schedule other than the rollover election under s. 219(5.2). CRA noted that it appeared that the taxpayer had met its filing requirements respecting Part XIV tax.

CRA noted that

it is our long-standing position that an assessment under each Part of the Act should be regarded as a separate assessment notwithstanding the fact that a single Notice of Assessment is used to inform a taxpayer of assessments under more than one Part of the Act.

As a nil assessment for the taxation year of the transfer had been issued more than four years previously, reassessment of Part XIV tax was now barred unless one of the circumstances described in ss. 152(4)(a) to (d) applied.