An insurance corporation (that reinsures policies issued by another insurer) holds partnership interests in several partnerships that have no insurance business and have permanent establishments in other provinces, but are not involved in an insurance business. The CRA correspondent suggested that considering a partner to have a PE in any province in which the partnership has a PE, as described in TI E56239, would distort the allocation of taxable income; and that the income for those other provinces instead should be allocated under Reg. 403(3)(a). The Directorate responded:
[W]herever [a] partnership is carrying on business through a PE, each partner is carrying on business through that PE. This applies to both the general and the limited partners. Consequently … the taxpayer will have a PE in any province where the partnerships have a PE.
… [B]ased on the fact that the taxpayer derives income (premiums) from reinsuring property situated in a province where the taxpayer has a PE due to being a member of a partnership, subsection 403(1) of the Regulations will allocate the taxpayer’s taxable income on a proportional basis to that province. …
In view of the taxpayer having a PE in the province(s) where the partnerships have a PE, subsection 403(3) does not apply to the taxpayer with respect to those provinces.
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|Tax Topics - Income Tax Regulations - Regulation 400 - Subsection 400(1)||a partner is attributed each PE of a partnership for Reg. 400(1) purposes||230|
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.