2018-0744881I7 Regulation 403 – allocation of income

Principal Issues: For the purposes of taxable income allocation under Regulation 403, should the taxpayer ignore the PEs of the partnerships in which the taxpayer is a partner?

Position: No.

Reasons: Any PE of the partnerships of which the taxpayer is a partner is a PE of the taxpayer. In addition, Regulation 403 does not restrict corporations to only use PEs related to the insurance business. Since the taxpayer is a member of a partnership that has a PE in XXXXXXXXXX, the taxpayer must make an allocation of taxable income to XXXXXXXXXX in accordance with Regulation 403.

Author: Agarwal, Lata
Section: 138, 248 (definition of insurance corporation), Regulations 400 and 403

                                                                                       June 8, 2018

John Parker                                                                    HEADQUARTERS
PIA Section                                                                     Income Tax Rulings
Large Business Audit Division                                        Directorate
International, Large Buss. & Investigations Branch        Lata Agarwal, CPA,
                                                                                        CMA, MBA

                                                                                        2018-074488

Provincial income allocation – permanent establishments of insurance corporation

We are writing in response to your email dated February 20, 2018, in which you have asked us to confirm the CRA’s position stated in technical interpretation (“TI”) E56239 that each member of a partnership has a permanent establishment (“PE”) in the province in which the partnership has a PE.

Your email describes a corporate taxpayer that filed Form T2 Schedule 5, Tax Calculation Supplementary – Corporations, for its XXXXXXXXXX taxation year, as an insurance corporation under section 403 of Part IV of the Income Tax Regulations (the “Regulations”). XXXXXXXXXX, it holds partnership interests in several partnerships that maintain PEs in other provinces, but are not involved in an insurance business. However, whereas the taxpayer reinsures policies issued by another primary insurer in XXXXXXXXXX, for the purposes of the calculations in Form T2 Schedule 5, the taxpayer has disregarded the PEs of the partnerships. In the taxpayer’s view, the Department of Finance intended that under Part IV of the Regulations corporations be taxed only in the provinces where they have PEs on the taxable income earned/related to each of the PEs.

In your view, the application of the CRA’s policy of considering a partner to have a PE in any province in which the partnership has a PE, as described in TI E56239, will distort the allocation of taxable income of the taxpayer and will be contrary to the scheme and purpose of section 403 of the Regulations. You also advise that the application of this policy will significantly impact the provincial allocation of insurance corporations’ income and may encourage abusive tax planning. In regards to the Regulations, in your view:

1.    Paragraph 400(2)(c) provides the (only) PE deeming rule applicable to insurance corporations.

2.    Since subsection 402(6) of the Regulations states: “For the purposes of subsection (3), where part of the corporation’s operations were conducted in partnership with one or more other persons…”, subsection 402(6) does not apply for the purposes of section 403.

3.    The wording of section 412 of the Regulations indicates that if a corporation is one to which one of the specialty regulations such as section 403 applies, then only the specialty regulation applies to that business. The divided business regulation provided in section 412 does not apply.

4.    The wording of subsection 403(1) (“Notwithstanding subsections 402(3) and (4)….”) implies that section 403 is a standalone allocation provision and that subsection 402(3) (which provides general rules for allocation of income where a corporation has PE in two provinces) is not applicable.

5.    Applying the wording of paragraph 403(3)(a) (“…where an insurance corporation had no permanent establishment in a taxation year in a particular province….. (a) each net premium for that year in respect of insurance on property situated in the particular province shall be deemed to be a net premium in respect of insurance on property situated in the province in which the permanent establishment of the corporation to which the net premium is reasonably attributable is situated;…”;…), the taxpayer’s net premiums are reasonably attributable to XXXXXXXXXX since XXXXXXXXXX the taxpayer is licensed and has a PE pursuant to paragraph 400(2)(c) of the Regulations.

Our comments

Generally speaking, a partnership is a relationship that exists between two or more persons carrying on business in common with a view to profit. Therefore, wherever the 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, in our view, since the taxpayer is a member of various partnerships, for the purposes of the allocation rules in section 403 of the Regulations, the taxpayer will have a PE in any province where the partnerships have a PE.

Further, pursuant to subsections 403(1) and (3) of the Regulations, where an insurance corporation has a PE in a particular province, taxable income of the corporation will be allocated to the province. In this regard, based 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 addition, we offer the following comments in regards to the application of the specific provisions discussed in your memo:

1.    Paragraph 400(2)(c) states:

For the purposes of this Part, "permanent establishment" in respect of a corporation means a fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse, and

(c) an insurance corporation is deemed to have a permanent establishment in each province and country in which the corporation is registered or licensed to do business;

Paragraph 400(2)(c) does not indicate that it is an exclusive (“notwithstanding”) or exhaustive (“means”) provision such that it would prevent consideration of any situation other than as described in this paragraph that would cause the taxpayer to otherwise have a PE, such as where a taxpayer as a partner has a PE in a province due to the partnership’s PE. We agree that subsection 402(6) does not apply for the purposes of section 403. However, the taxpayer would have PEs in any province where it is a partner by virtue of the preamble of subsection 400(2) of the Regulations.

2.    We agree with you that based on the facts as described by you, section 412 does not apply to the taxpayer. Section 412 precludes from the scope of its application, certain specialty corporations such as the corporations subject to section 403 of the Regulation. Since the taxpayer is an insurance corporation, section 403 applies.

3.    We agree with you that where subsection 403(1) applies, subsections 402(3) and (4) do not apply. However, as noted in 1 above, it is its membership in the partnerships that causes the taxpayer to have a PE in the provinces where the partnerships have PEs.

4.    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.

We hope the above information is helpful. Should you have any questions, please do not hesitate to call Lata Agarwal at 613-670-9021 or me at 613-670-9031.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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