CRA confirms that payroll for inter-provincial income allocation purposes is not reduced by employee expenses and takes into account payroll of PEs outside Canada

The inter-provincial income allocation formula in Reg. 402(3) gives half weight to the proportion of the total salaries and wages of the corporation which is paid to employees of provincial permanent establishments. Notwithstanding that "salary or wages" is defined in s. 248(1) as income from employment under subdivision a, so that it is reduced by s. 8 expenses, CRA interprets the phrase in the Reg 402(3) as the (gross) amounts paid – but otherwise applies the s. 248(1) definition for Reg 402(3) purposes so that, for example, stock option benefits are included.

CRA interprets the denominator of the Reg 402(3) payroll fraction as including the employment income paid to non-resident employees attached to permanent establishments of the corporation outside Canada.

Neal Armstrong. Summary of 11 March 2014 Memo 2013-0506801I7 under Reg 402(3).