and Revenue Administration
Corporate Tax Act
Interpretation Bulletin CTIB-3R1
||July 6, 2012
||Alberta Treasury Board and Finance, Tax
and Revenue Administration
|For more information:
CTIB-3R1 / July 2012
CORPORATE TAX ACT INTERPRETATION BULLETIN:
CORPORATIONS ALLOCATING INCOME AMONG PERMANENT ESTABLISHMENTS IN MORE THAN ONE JURISDICTION
NOTE: This interpretation bulletin is intended to explain legislation and provide specific information. Every effort has been made to ensure the contents are accurate. However, if a discrepancy should occur in interpretation between this interpretation bulletin and governing legislation, the legislation takes precedence.
This interpretation bulletin explains how taxable income is allocated
among permanent establishments. The topics included are:
- Under section 5(1) of the Alberta Corporate Tax Act (the Act), a corporation
with a permanent establishment in Alberta at any time in a taxation year is required to
pay income tax on the amount taxable in Alberta for that taxation year. More information about “permanent establishment” is provided in Interpretation Bulletin CTIB-1,Taxability of a Corporation in Alberta on the Basis of Permanent Establishment.
- If a corporation has a permanent establishment only in Alberta, all of its taxable income is allocated to Alberta. If a corporation does not have a permanent establishment in Alberta, none of its taxable income is allocated to Alberta.
- When a corporation has a permanent establishment in more than one jurisdiction, taxable income is allocated to each of those jurisdictions following the rules in section 2 of the Alberta Corporate Tax Regulation (provincial Regulation). The provincial Regulation generally applies the Part IV regulations under the Income Tax Act (Canada) (federal Regulation).
- Corporations of the following types cannot allocate their taxable income using the general rule described below in paragraph 6. Instead, they are required to calculate their allocation using the specific formula described in the federal and provincial regulations.
||To be used by
||trust and loan corporations
||grain elevator operators
||bus and truck operators
Under section 2 of the provincial Regulations, where one of the allocable factors stated in the federal Regulation 404, 406, 407, 408, 409, and 411 is nil, the amount taxable in Alberta is calculated based solely on the allocation to Alberta from the other allocable factor.
- Corporations not subject to industry-specific rules are required to allocate their taxable income using the general rule in federal Regulation 402(3).
- Under the general rule, the average of a gross revenue factor and a salary and wage factor is used to determine the portion of taxable income allocated to Alberta. The amount allocated to Alberta for a taxation year is:
TI x 1/2 [A/B + C/D]
TI = taxable income for the year for Alberta (the calculation of federal taxable income can differ from the calculation of taxable income for Alberta. For example, the corporation may use different discretionary deduction amounts for Alberta).
A = allocable gross revenue that is reasonably attributable to Alberta;
B = allocable gross revenue of the corporation for the year;
C = allocable salaries and wages paid in the year to employees in Alberta;
D = allocable salaries and wages paid by the corporation in the year.
- If the corporation has paid no salaries and wages for the year, the allocation is based only on the gross revenue factor. If the corporation has no allocable gross revenue for the year, the allocation is based only on the salary and wage factor. No averaging is required in these cases; therefore, do not multiply by one-half.
CORPORATION IS A MEMBER OF A PARTNERSHIP
- If the corporation is a member of a partnership, the corporation should include its proportionate share of the partnership gross revenue and salary and wages in the appropriate factor in the general formula. The corporation’s proportionate share is the same as the corporation's share of the partnership’s total profit or loss according to the partnership agreement.
- For income allocation, gross revenue of a corporation for a taxation year generally includes the total of all amounts received or receivable in the year, but does not include the following items:
- any amounts on account of capital, such as taxable capital gains;
- interest on bonds, debentures or mortgages, including interest on promissory and other notes, bankers acceptances, intercompany loans, certificates, guaranteed investment certificates, unsecured debt instruments, or other similar obligations;
- dividends on shares of capital stock; or
- rentals or royalties from property that is not used in connection with the principal business operations of the company.
- The following are examples of other items that can affect allocable gross revenue:
- early payment discounts given to customers should not be deducted from allocable gross revenue;
- royalties paid to the Crown should not be deducted;
- interest on trade receivables and bank account interest should be included;
- revenue from the sale of scrap or other miscellaneous items should be included;
- foreign exchange gains should be included if the item on which the gain was incurred relates to revenue and not to capital;
- sales returns should be deducted;
- volume discounts given to customers at the time of sale (other than lump-sum payments after the sale) should be deducted;
- volume and early payment discounts received from suppliers should be excluded;
- reimbursement of expenses reduce the appropriate expense and should be excluded;
- goods and services tax (GST), harmonized sales tax (HST), provincial sales taxes, or similar taxes for which the corporation is acting only as a collector should be excluded.
Gross revenue is attributed to a permanent establishment according to the rules in federal regulation 402(4) as explained below.
Allocation Rules for Sale of Goods
- For the purpose of determining the gross revenue for the year reasonably attributable to a permanent establishment in a province or country other than Canada, the following rules apply:
- If the goods are sold and shipped to a customer located in a province or a country where the corporation has a permanent establishment, gross revenue is allocated to the jurisdiction where the goods were shipped.
- Except as specified in c) below, if the goods are sold and shipped to a customer in a province or a country other than Canada where the corporation has no permanent establishment, gross revenue is allocated to the permanent establishment to which the person negotiating the sale can reasonably be regarded as being attached.
- If the corporation ships goods it manufactures or produces to a customer located in a country, other than Canada, where the corporation does not have a permanent establishment, gross revenue is allocated as follows:
- if the goods are produced or manufactured by the corporation entirely in one province, to the permanent establishment in that province; or
- if the goods are produced or manufactured by the corporation partly in a province and partly in another place, to the permanent establishment in that province, based on the proportion that salaries and wages paid in the year to employees of the permanent establishment where the goods were manufactured or produced is to the total salaries and wages paid in the year to employees of all permanent establishments where the goods were manufactured or produced.
- If merchandise sold to a customer is shipped on the instructions of that customer to some other person, except as specified in e) below, and the customer’s office with which the sale was negotiated is located in a province or country other than Canada where the corporation does not have a permanent establishment, and the person negotiating the sale may reasonably be regarded as being attached to a permanent establishment in that province or country, then gross revenue is allocated to that permanent establishment.
- If merchandise sold to a customer is shipped on the instructions of that customer to some other person and the customer’s office with which the sale was negotiated is located in a country other than Canada, where the corporation does not have a permanent establishment, and the merchandise was produced or manufactured, gross revenue is allocated as described in c) above.
- If reasonably determinable by the vendor, the destination of a shipment is the place where the customer will use or resell the goods. The destination may not be obvious and factors such as where title passes and the delivery point shown on source documents must be considered.
Allocation Rules for Provision of Services
- If a corporation provides services in a province or a country where it has a permanent establishment, gross revenue from those services is allocated to the jurisdiction where the service is provided. If the services are provided in a province or a country other than Canada and the corporation does not have a permanent establishment there, the revenue is allocated to the permanent establishment to which the person negotiating the service contract can reasonably be considered to be attached.
- Revenue from the rental of real property is allocated to the permanent establishment in which the property is located.
- Leasing revenue is allocated as follows:
- Revenue should be allocated to the permanent establishment in the jurisdiction in which the leased property is being used, where the corporation has reasonable knowledge of such information.
- If the corporation does not have reasonable knowledge of where the property is being used, or the corporation does not have a permanent establishment in the jurisdiction described above, the revenue should be allocated to the permanent establishment to which the person negotiating the lease may reasonably be regarded as being attached.
SALARIES AND WAGES
- Salaries and wages include amounts paid in the taxation year to employees of the corporation.
- For income allocation, salary and wages include:
- taxable benefits paid to employees in the taxation year;
- directors’ fees;
- commissions paid to employees; and
- fees paid to another person, including a company, for services performed by that person or company are included in allocable salaries and wages if those services would normally be performed by employees of the corporation. Services "normally" performed by employees are those that are usually performed by the corporation's employees, but are temporarily contracted out for some reason (e.g., lack of capacity, labour problems, etc.). If a decision is made to contract out services on a permanent basis, the fees paid are not included in allocable salaries and wages.
- For income allocation, the following amounts are not included in salaries and wages:
- payments for superannuation, pension benefits and retiring allowances,
- commissions paid to independent agents,
- payroll expenses such as employer share of Canada Pension Plan and Employment Insurance premiums, and
- accrued vacation pay and unpaid bonuses.
- Salaries and wages of employees are allocated to the permanent establishment to which the employees are attached or normally report to work. This allocation is not altered if an employee is sometimes required to travel to other jurisdictions to perform duties.
- Please refer to federal Regulation 402.1 for rules regarding central paymaster situations.
PERMANENT ESTABLISHMENT PART OF THE YEAR
- If there is a permanent establishment in a jurisdiction for part of a year, taxable income for the entire year is allocated to that jurisdiction according to the applicable formula.