20 November 2006 Internal T.I. 2006-0203681I7 - T106 Filing requirements

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: Are amounts allocated or charged to a Canadian Branch from the non-resident corporation Head Office subject to the reporting requirements under section 233.1 of the Income Tax Act?

Position: No

Reasons: Section 233.1 is only relevant in the case of transactions that take place between related but nevertheless different taxpayers.

									November 20, 2006

Paul Stesco								Isabeau Morrissette
International and Large Business Directorate		613-957-2118
344 Slater, 6th Floor
Ottawa ON  K1A OL5
									2006-020368

T106- Information Return for Reporting Transactions With Non-Arm's Length
Non-Residents

This is in response to your email to Olli Laurikainen on August 31, 2006 regarding T106 filing requirements. In particular, you are asking if amounts allocated/charged to a Canadian Branch from a non-resident corporation's Head Office are subject to the reporting requirements under section 233.1 of the Income Tax Act (the "Act").

Legislation

Section 233.1 of the Act provides that a "reporting person" must file an information return for a taxation year in respect of the "reportable transactions" in which the reporting person and a non-resident non-arm's length person participated in the year. Subsection 233.1(1) of the Act contains the following definitions:

"reportable transaction" means

(a) in the case of

(i) a reporting person for a taxation year who is not resident in Canada at any time in the year, or
(ii) a reporting partnership for a fiscal period no member of which is resident in Canada in the period,

a transaction or series of transactions that relate in any manner whatever to a business carried on in Canada by the reporting person or partnership in the year or period or a preceding taxation year or period; and

(b) in any other case, a transaction or series of transactions that relate in any manner whatever to a business carried on by a reporting person (other than a business carried on by a reporting person as a member of a partnership) or partnership in a taxation year or fiscal period.

...

"reporting person" for a taxation year means a person who, at any time in the year, (a) is resident in Canada; or

(b) is non-resident and carries on a business (other than a business carried on as a member of a partnership) in Canada.

"transaction" includes an arrangement or event.

Also, subsection 233.1(2) provides that:

"Subject to subsection (4), a reporting person for a taxation year shall, on or before the reporting person's filing-due date for the year, file with the Minister, in respect of each non-resident person with whom the reporting person does not deal at arm's length in the year and each partnership of which such a non-resident person is a member, an information return for the year in prescribed form containing prescribed information in respect of the reportable transactions in which the reporting person and the non-resident person or the partnership, as the case may be, participated in the year."

Analysis

Parliament has provided an extended meaning of the word "transaction" for the purposes of section 233.1 of the Act as it is defined to include "an arrangement or event". An allocation of expenses clearly constitutes "an arrangement or event". Thus, the question at issue is whether section 233.1 will come into play only in the case of an arrangement or event which takes place between two or more different taxpayers and as such, would not apply to an allocation by a non-resident Head Office to a Canadian Branch (i.e. an allocation of expenses between two cost centres of the same taxpayer).

You are arguing that, in light of the purposes of T106 reporting, which is to be used by the CRA as a tool to assess risk in the context of transactions that relate to cross-border business activities, the structure in which a business is conducted should not affect the reporting of the same or similar transaction(s). In your view, the wording used in section 233.1 avoids this potential inequity by using the definitions of "reporting person" and "reportable transaction" that are broad enough to include an allocation to a branch.

While the arguments you have submitted have some merit, we are of the view that the words of subsection 233.1(2) clearly contemplate two persons i.e. (1) the reporting person and (2) a non-resident person with whom the reporting person does not deal at arm's length. Also, since a non-resident corporation which carries on business in Canada must file a tax return pursuant to

clause 150(1)(a)(i)(B), we would question whether any additional information could be gained in a section 233.1 of the Act information return filed by a non-resident corporation. In other words, since all the revenues and expenses of the branch are made or incurred by the non-resident corporation of which the branch is a part we would have thought the T-106 would contain effectively the same information as the T2 return.

For these reasons, we are of the view that the wording used in section 233.1 does not cover the allocation between the non-resident Head Office and the Canadian Branch.

We trust our comments are of assistance.

Olli Laurikainen, C.A.

Manager
For Director
International Tax and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch