Royalties were payable by Canco to a non-resident for the right to use copyright and trademarks in connection with the design, manufacturing and sale of products in countries in a particular region. Regarding what portion of each royalty payment should be treated as exempted under s. 212(1)(d)(x) as amount deductible in computing the income of the Canadian-resident taxpayer, under Part I, from a business carried on in a country other than Canada, CRA stated:
Where a taxpayer carries on a single business partly in Canada, and partly in one or more countries other than Canada, paragraph 4(1)(b) generally requires that the taxpayer’s income or loss from the business that is carried on in a particular country be computed in accordance with the Act as if the taxpayer had no other income or loss, except from the part of the business that was carried on in that particular country. Further, paragraph 4(1)(b) generally provides that the income or loss must be computed as if the taxpayer was allowed no deductions in computing its income, except such deductions as may reasonably be regarded as wholly applicable to the part of the business that was carried on in that particular country and except such part of any other deductions as may reasonably be regarded as applicable thereto.
As a result, for the purpose of subparagraph 212(1)(d)(x), where a royalty payment is deductible in computing the income of a taxpayer, under Part I, from a business carried on partly in Canada and partly in countries other than Canada, paragraph 4(1)(b) requires that the payment be allocated between the part of the business that is carried on in Canada, and the parts of the business that are carried on in each of the countries other than Canada. Only the portion of the royalty payment that is allocated to the parts of the business that are carried on in countries other than Canada would qualify for the exclusion provided under subparagraph 212(1)(d)(x).