Provincial Income Allocation – Section 400 of the Income Tax Regulations
The following questions about provincial income allocation have been addressed and agreed upon by all members of the Allocation Review Committee (ARC), previously known as the Tri-Party Review Allocation Committee (TRAC). The ARC members are the tax administrations of Alberta, Québec and Ontario, and the CRA on behalf of the provinces with which the CRA has tax collection agreements.
Question 1 – Debentures
What is the approach of the ARC with regard to the exclusion of investment income in computing gross revenue in the application of subsection 402(5) of the Income Tax Regulations (the Regulations), and corresponding provincial legislation?
Response 1
Subsection 402(5) of the Regulations excludes interest on various financial instruments from the “gross revenue” component of the income allocation formula in subsection 402(3).
It is currently proposed by the ARC that a broad interpretation of the amounts excluded is appropriate for the purposes of subsection 402(5) of the Regulations.
This broad interpretation would include interest on promissory and other notes, bankers’ acceptances, inter‑company loans, certificates, GICs, unsecured debt instruments and other similar obligations, with the exception of interest on trade receivables and bank interest.
The ARC members will be looking to make their own announcement in 2009.
Question 2 – Substantial Machinery or Equipment
What is the ARC’s current position on how long the substantial machinery or equipment must be used in a province or jurisdiction in order to deem a corporation to have a permanent establishment (PE) in that province or jurisdiction? Specifically, has the ARC developed any guidelines to qualify the phrase “at any time in a taxation year” as stated in paragraph 400(2)(e) of the Regulations?
Response 2
Generally, where a corporation uses (rented or owned) substantial machinery or equipment in a province or jurisdiction:
- after 30 continuous days, on a particular site or project; or
- after 90 days cumulative in a 12-month period;
the corporation is deemed to have a PE in that province or jurisdiction.
The 30-day test applies to each contract or project. The 90-day test applies to all contracts and projects in the province or jurisdiction in a 12-mont period. Each is a stand-alone test, and both can result in a deemed PE of the corporation. Where the 12-month period straddles two taxation years, the corporation will be deemed to have a PE in the province or jurisdiction in the second taxation year, after 30 continuous days or 90 days cumulative.
Question 3 – Allocation of Leasing Revenue
What is the ARC’s position on how leasing revenue with respect to non-financial leases should be allocated for all provinces and jurisdictions in order to avoid double taxation?
Response 3
Leasing revenue should be allocated as follows:
- Revenue should be allocated to the PE in the jurisdiction in which the lease property is being employed, if the taxpayer has reasonable knowledge of such information.
- If the taxpayer does not have reasonable knowledge of where the property is being employed, or if the taxpayer does not have a PE in the province or jurisdiction described above, the revenue should then be allocated to the PE to which the person negotiating the lease may reasonably be regarded as being attached.