Words and Phrases - "reasonably attributable"
24 October 2018 Internal T.I. 2018-0741041I7 - Allocation of net premiums under s. 403(4)
The taxpayer, a Canadian property insurer insures risk inside and outside Canada, but has no permanent establishment (“PE”) outside Canada. Although it included its “out of Canada net premiums” (“OCNP”) in income, it has not made any allocation under Reg. 403(4) as in its view this effectively allocated the OCNP to the provinces in proportion to the net premiums written in the provinces, which it considered to be a reasonable allocation method.
The Directorate stated:
[T]he term “reasonably attributable” … denotes … a direct causal connection … between the OCNP and the PE taking in account all the applicable facts of the case. …
[Per] E9807035 … 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. …
[W]here a taxpayer has made an allocation under subsection 403(4) and the taxpayer’s approach is reasonable, the CRA should not require the taxpayer to use a different method of allocation. …
[T]he allocation of the OCNP based on where the policies are underwritten … appears to be a reasonable method. Similarly, allocation of the OCNP on some other basis, such as where the contracts are negotiated or serviced … may also be reasonable … .
The Directorate went on to note that the taxpayer’s method was unreasonable, stating:
Had the intent been to allocate based on the allocation of net premiums in subsection 403(1), it would have been much simpler to just have subsection 403(4) exclude the OCNP from net premiums.
Devon Canada Corporation v. The Queen, 2013 TCC 415
Following an acquisition of control of a predecessor of the taxpayer (Home Oil), a partnership of which Home Oil was a direct member (the Anderson Partnership) transferred resource properties (the Anderson Properties) to a subsidiary partnershp of it (the Devon Partnership). The question posed (under s. 58(1)(a) of the Tax Court of Canada Rules (General Procedure)) was whether Home Oil could continue to deduct successored resource expenses from income allocated to it by the Anderson Partnership (which, in turn, had been allocated to it by the Devon Partnership as income from the Anderson Properties) notwithstanding that the Anderson Properties were no longer held by the Anderson Partnership.
Before turning to this question, Hogan J noted (at para. 35) that there was no requirement that the directly held partnership referred to in s. 66.7(10)(j) (i.e., the Anderson Partnership) continue to own the resource properties (i.e., the Anderson Properties) in respect of which the successored resource expenses are deducted.
Respecting the main question, Hogan J stated (at para. 45):
In a tiered partnership, the source and location of income is preserved through each level of partnership until the income is ultimately recognized by, and taxed in the hands of, the corporate or individual partners.
Since the income allocated to Home Oil through the tiered partnerships thus continued to be attributable to the Anderson Properties, he was able to conclude (at para. 36) that Home Oil was entitled (based on its partnership interest percentage) to successor deductions in respect of the Anderson Properties:
[I]ncome attributable to property transferred by a corporate partner from a partnership of which it was a direct member to a subsidiary partnership following an acquisition of control remains income that "may reasonably be regarded as being attributable to the production from" the resource property for the purposes of subparagraph 66.7(10)(j)(ii).
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| Tax Topics - Income Tax Act - Section 102 - Subsection 102(2) | source preservation in 2-tier partnership | 84 |