Principal Issues: (1) Is there an interprovincial arbitration process to avoid double taxation regarding the allocation of income earned in a province by a corporation? (2) Can a taxpayer express his arguments and position during the arbitration process? (3) Do provinces have to comply with an agreement reached during the arbitration process?
Position: (1) Yes, an arbitration process to avoid double taxation regarding the allocation of income earned in a province by a corporation is provided in the Memorandum of Understanding For the Avoidance of Double Taxation of Corporations (the “MOU”). Parties receiving a proposed adjustment have six months from the day of receipt of a proposal to present their position to each affected party. If an agreement has not been reached, the file will be subject to the following resolution process: First level: Where a party replies to a proposal, the proposing party may concur or make a counterproposal within three months of receiving the reply, and where a counterproposal is made, all affected parties will have an additional three months to reply. Second level: If, after having the opportunity to submit their points of view, the parties have not agreed on an adjustment proposal, the issue is then submitted to the appointed representatives of each affected party who will attempt to settle the dispute. Third level: Where these appointed representatives have not agreed on a proposed adjustment, the file will be referred to the Allocation Review Committee. Fourth level: Where an agreement is not reached at the third level, the affected parties, after agreeing to a common set of facts, will refer the matter to the Assistant Commissioner and Assistant Deputy Ministers involved. (2) Yes, a taxpayer can express his arguments and position at the first level of the resolution process. (3) Each province involved in the resolution process is represented in each of the four levels. Where an agreement is reached, each affected province must comply with the agreement.
Reasons: Application of the MOU.
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12. CRA's role in inter-provincial arbitration
Sometimes a province, as a result of an audit, will change the formula for allocating a corporation's activities between provinces (the "Allocation Formula"), for example, by determining that a permanent establishment exists in the province in question, thereby allocating a portion of the corporation's taxable income to the province.
This can lead to double taxation and we understand that there is an arbitration process in which the CRA intervenes to resolve disputes between provinces so as o avoid double taxation.
Questions to the CRA
a) Can you confirm that there is an inter-provincial arbitration process and, if so, how it works?
b) Can the taxpayer present its position during this process?
c) Are provinces obliged to comply with a decision reached in this process?
CRA Response to Question 12(a)
One of the important provisions relating to the allocation of a taxpayer's taxable income among the various provinces and territories is found in ITR section 400 and its provincial counterpart, if any ("Allocation of Taxable Income").
The arbitration process in this regard between the provinces is set out in the Memorandum of Understanding to Avoid Corporate Double Taxation (the "Memorandum") signed by the CRA, Alberta and Quebec (the "Signatories").
The CRA administers and collects corporate income tax in all Canadian provinces and territories except Alberta and Quebec. In that regard, the CRA represents those provinces and territories in a dispute with either or both of the Signatories involved.
The Memorandum essentially provides that none of the Signatories will issue an assessment that modifies the Allocation of Taxable Income made by a corporation in its tax return by virtue of ITR section 400 without prior written notification to them, if such modification has an impact on the other Signatories.
If the Signatories concerned cannot reach an agreement on the application of the Allocation of Taxable Income following a proposal by one of them, the case will be subject to the settlement process described below.
First level
Where an affected Signatory responds to the proposed change to the Allocation of Taxable Income, the Signatory that proposed the adjustment may agree to it or make a counter-proposal within three months. Where a counter-proposal is made, the Signatories concerned have a further three months to respond.
Second level
If the Signatories concerned do not agree after having had the opportunity to express their views on a proposed remedy, the matter shall be referred to the representatives of each Signatory concerned who are expressly designated in the Memorandum, and who shall attempt to resolve the disagreement.
Third level
If the designated representatives do not agree on a proposed adjustment, the case is referred to the Allocation Review Committee.
Fourth level
Where no agreement is reached at the third level, the Signatories concerned, after agreeing on a set of facts, shall refer the matter to the relevant Deputy Commissioner and Assistant Deputy Ministers.
CRA Response to Question 12(b)
Yes, the taxpayer can present its position during the first level of the Protocol.
CRA Response to Question 12(c)
For a decision to be made in the arbitration process, there must be a dispute over the Allocation of Taxable Income for a corporation between at least two Signatories, namely between the CRA, on behalf of the provinces or territories whose corporate income taxes it administers and collects, Alberta and/or Quebec. Each of the Signatories involved in the dispute is represented at all four levels provided for in the Memorandum and thus takes part in all decisions made during the arbitration process.
Where an agreement is reached in the arbitration process to resolve a dispute between the CRA and one or more of the signatory provinces to the Memorandum (Alberta and/or Quebec), the relevant province or territory represented by the CRA must comply with that agreement.
Whether or not an agreement is reached in the arbitration process to resolve a dispute with respect to the Allocation of Taxable Income for a corporation, the taxpayer concerned may still exercise the taxpayer’s right of appeal under the applicable legislation with respect to any assessments issued.
Guylaine Gladu
(343) 542-8592
October 7, 2020
2020-085224
Response prepared in collaboration with:
Jason Beaulac, Large Business Audit Division
International and Large Business Directorate
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