The taxpayer, a Canadian property insurer insures risk inside and outside Canada, but has no permanent establishment (“PE”) outside Canada. Although it included its “out of Canada net premiums” (“OCNP”) in income, it has not made any allocation under Reg. 403(4) as in its view this effectively allocated the OCNP to the provinces in proportion to the net premiums written in the provinces, which it considered to be a reasonable allocation method.
The Directorate stated:
[T]he term “reasonably attributable” … denotes … a direct causal connection … between the OCNP and the PE taking in account all the applicable facts of the case. …
[Per] E9807035 … the taxpayer should attribute a portion of its gross revenues to each permanent establishment in recognition of the value of the ancillary services provided by that establishment. …
[W]here a taxpayer has made an allocation under subsection 403(4) and the taxpayer’s approach is reasonable, the CRA should not require the taxpayer to use a different method of allocation. …
[T]he allocation of the OCNP based on where the policies are underwritten … appears to be a reasonable method. Similarly, allocation of the OCNP on some other basis, such as where the contracts are negotiated or serviced … may also be reasonable … .
The Directorate went on to note that the taxpayer’s method was unreasonable, stating:
Had the intent been to allocate based on the allocation of net premiums in subsection 403(1), it would have been much simpler to just have subsection 403(4) exclude the OCNP from net premiums.