26 July 1995 External T.I. 9516225 - ALLOCATION OF CAPITAL FOR I.3 PURPOSES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

A "Single Purpose Corporation" which has no net income - how do you allocate to a permanent establishment for purposes of I.3 Tax (Reg. 8600) ?

Does a "Single Purpose Corporation" have a Permanent Establishment in a province ?

Position TAKEN:

Reg. 8601 deems taxable income to be $1000 for purposes of determining the allocation.

Question of Fact

Reasons FOR POSITION TAKEN:

Reading of reg. 8601

		                      951622
XXXXXXXXXX	                      J.P. Dunn

Attention: XXXXXXXXXX

July 26, 1995

Dear Sirs:

Re: Single Purpose Corporation - Large Corporation Tax

We are writing in response to your letter of June 9, 1995 in which you had requested the views of the Department regarding subsection 181.2(1) of the Income Tax Act (the "Act") and the related Income Tax Regulations (the "Regulations") in the calculation of the "taxable capital employed in Canada" of a corporation. In particular, you inquired whether, in situations in which a corporation has no income or loss for a year, section 8600 of the Regulations would yield a result other than nil.

We note that the postamble to section 8601 of the Regulations states that "where the corporation's taxable income for the year is nil, the corporation shall, for the purposes of this section, be deemed to have a taxable income for the year of $1000". We note that this deeming provision applies to section 8601 of the Regulations in its entirety and not to a specific item or items in the algebraic formula contained therein. If a corporation's taxable income for a taxation year is nil, the deeming provision in the postamble applies to deem the corporation to have taxable income of $1,000 for that year. That $1,000 deemed taxable income is then allocated in accordance with the rules in item B of the formula in accordance with the provisions of Part IV of the Regulations.

With respect to Part IV of the Regulations, we note that it is a question of fact to be determined in accordance by reference to the provisions of subsection 400(2) of the Regulations whether a corporation has a permanent establishment in a province in a taxation year. To the extent that a corporation does not have a permanent establishment in a province in a taxation year, subsection 402(2) of the Regulations states that no part of the corporation's taxable income for the year shall be deemed to have been earned therein. Accordingly, in such circumstances, the amount determined pursuant to Part IV of the Regulations for the purpose of the allocation of income in item B of section 8601 of the Regulations would be nil with the result that the corporation would have no "taxable capital employed in Canada" for purposes of Part I.3 of the Act.

We trust that this is the information which you require.

Yours truly,

Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch