CRA indicates that losses from the non-Treaty-exempted portion of a Canadian branch business may be carried over to the taxable profits of such portion in other years

Where a US resident carries on, through a permanent establishment (PE) in Canada, a single business that consists of an activity resulting in income that is treaty-exempt, such as the cross-border transport by vehicle that is exempt under Art. VIII(4) of the Canada-US Treaty (the “Exempt Activity”), and an activity resulting in income that is not so exempt, e.g., intra-Canada transport (the “Taxable Activity”), that single business would fall within the Treaty-protected business definition (a business in respect of which “any income” of the taxpayer is exempt by treaty from Part I tax).

In 1999-0008185, CRA concluded that if the Taxable Activity for such a business produced a loss, such loss would not by virtue of ss. 115(1)(c) and 111(9) (prohibiting the deduction of losses from a treaty-protected business) be available to reduce profits from the Taxable Activity in another year.

When asked to comment, CRA indicated that the total business profits attributed to the Canadian PE must reflect what the PE would have been expected to earn if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions, dealing wholly at arm’s length with the US resident. Once such total profits were determined, they were required to be apportioned between the Exempt Activity under Art. VIII(4), and the Taxable Activity in accordance with arm’s length principles (in a consistent manner from year to year) so as to reasonably and accurately reflect the functions and risks associated with those respective activities. Provided that the taxpayer’s resulting allocation of revenue and expenses was appropriate, losses arising from the Taxable Activity could generally be deducted against profits from that same activity in accordance with s. 115(1)(c) and s. 111(9). This would allow the loss from the Taxable Activity to shelter future taxable profits from that same activity. No detailed technical explanation for this departure from 1999-0008185 was given.

Neal Armstrong. Summary of 2 December 2025 CTF Roundtable, Q.7 under s. 111(9).