2 December 2025 CTF Roundtable Q. 7, 2025-1080791C6 - Treaty-Protected Business

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: An update on the issue described in 1999-0008185.

Position: See below.

Reasons: See below.

2025 CTF Annual Tax Conference

CRA Round Table

Question 7: Treaty-Protected Business

The definition of “treaty-protected business” in subsection 248(1) was the subject of CRA Document No. 1999-0008185. This definition reads as follows:

“treaty-protected business” of a taxpayer at any time means a business in respect of which any income of the taxpayer for a period that includes that time would, because of a tax treaty with another country, be exempt from tax under Part I

Where a US resident (US Co) carries on, through a permanent establishment in Canada, a single business that is comprised of (a) an activity which results in income that is treaty-exempt (“the Exempt Activity”); and (b) an activity which results in income that is not exempt from Canadian tax under an income tax treaty (“the Taxable Activity”), the business would fall within the “treaty-protected business” definition. As a “treaty-protected business,” to the extent that the Taxable Activity produces a loss, such loss would not be available, pursuant to paragraph 115(1)(c) and subsection 111(9), to reduce the profits from the Taxable Activity in another year.

The above scenario may arise where Article VIII(4) of the Canada-U.S. Income Tax Convention (“the Treaty”) applies to exempt from Canadian income tax, the profits of US Co’s Canadian branch operations derived from point-to-point cross-border motor vehicle delivery of passengers or property (i.e. the Exempt Activity), leaving intra-Canada profits subject to Canadian income tax pursuant to subparagraph 115(1)(a)(ii)(i.e. the Taxable Activity). CRA Document No. 1999-0008185 noted that the business of the non-resident would be a “treaty-protected business” notwithstanding that only a portion of the income from the business is treaty-exempt. As a result, to the extent that the Taxable Activity produces a loss, such loss would not be available, pursuant to paragraph 115(1)(c) and subsection 111(9), to reduce the profits from the Taxable Activity in another year.

The CRA acknowledged that the scenario outlined above may produce results that are inconsistent with the object and purpose of the legislation. Are there any developments that the CRA can share?

CRA Response

Article VIII(4) of the Treaty provides that profits from the Exempt Activity are not subject to Canadian income tax:

Notwithstanding the provisions of Articles VII (Business Profits) and XII (Royalties), profits of a resident of a Contracting State engaged in the operation of motor vehicles or a railway as a common carrier or a contract carrier derived from:

(a) the transportation of passengers or property between a point outside the other Contracting State and any other point; or

(b) the rental of motor vehicles (including trailers) or railway rolling stock, or the use, maintenance or rental of containers (including trailers and related equipment for the transport of containers) used to transport passengers or property between a point outside the other Contracting State and any other point

shall be exempt from tax in that other Contracting State.

The amount of profit exempt from tax in Canada under Article VIII(4) is determined with reference to Article VII of the Treaty and the specific requirements noted therein. The exempt profit is equal to a portion of the total business profit attributable to the business carried on by the US resident through its Canadian permanent establishment (which in the above scenario includes both the Exempt Activity and the Taxable Activity). The total business profit attributed to the Canadian permanent establishment must reflect the profit which such permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the US resident and with any other person related to the US resident.

In determining the amount of the profit exempt under Article VIII(4), the total business profits attributed to the Canadian permanent establishment must be apportioned between the Exempt Activity and the Taxable Activity. Such apportionment requires the use of arm’s length principles. In particular, the allocation of the revenues and expenses between the Exempt Activity and the Taxable Activity must reasonably and accurately reflect the functions and risks of those activities and be computed in a consistent manner from year to year. For example, an allocation of revenues and expenses that inappropriately results in profits being skewed to the Tax Exempt Activity and losses being skewed to the Taxable Activity would, generally, not be reflective of employing arm’s length principles.

Further to the comments noted in CRA Document No. 1999-0008185, provided that a taxpayer in such scenario (US Co in this question) computes its profit attributable to the Exempt Activity (and consequently to the Taxable Activity) in an appropriate manner as described above, losses realized in respect of the Taxable Activity would generally be deductible against profits from that same activity according to paragraph 115(1)(c) and subsection 111(9). However, an unreasonable or inappropriate allocation of revenues and expenses between the two activities may result in an adjustment to the amount exempt under Article VIII(4) of the Treaty and the denial of any losses in respect of the Taxable Activity.

Komal Patel
2025-108079
December 2, 2025