CRA publishes a new Folio on inter-provincial corporate income allocation

CRA has released a new Folio on the corporate interprovincial income allocation rules in Part IV of the Regulations. Positions noted include:

• Gross revenue for Pt. IV purposes including the general allocation formula in Reg. 402(3) (generally giving equal weight to relative gross revenues and relative salaries and wages) does not include expenditure-related credits, such as expenditure reimbursements, volume rebates (“as these amounts would normally relate to expenditures incurred”) and governmental assistance respecting taxpayer expenditures.
• Reg. 402(5), which provides that, for Reg. 402(3) purposes, corporate gross revenue does not include interest on bonds, debentures or mortgages, dividends - or rentals or royalties from property that is not used in connection with the principal business operations – is broadly interpreted by CRA to also extend to interest on promissory and other notes, bankers’ acceptances, intercompany loans, certificates, guaranteed investment certificates, and any unsecured debt instruments.
• Regarding the allocation pursuant to Regs. 402(4)(j) and 402(5) of rents from land that is used in the corporation’s principal business operations, CRA considers that gross revenue from non-financial leases (generally, operating leases) should be allocated:
  • to the permanent establishment in the province in which the leased property is being used, where the corporation has reasonable knowledge of such information (based on what it already was required to know for business reasons); or.
  • if the corporation does not have reasonable knowledge of where the property is being used, or does not have a permanent establishment in the jurisdiction described in (a) above, the gross revenue should be allocated to the permanent establishment to which the person negotiating the lease may reasonably be regarded as being attached.
• Regarding the recharacterization under Reg. 402(7) of fees paid by a corporation to a services provider as salary where the services are in respect of services that would “normally” be performed by the corporation’s employees, CRA considers that these rules apply where:
  • The service or function performed by the service provider must be one that is already performed by an employee of the corporation. Subsection 402(7) will not apply in situations where the corporation does not have any employees.
  • The need for the individual service provider to perform a particular service or function is short-term.
• Each member of a partnership has a permanent establishment where the partnership has PEs, and the gross revenue and salaries and wages of the partnership for a taxation year are considered to be allocated under Reg. 402(6) based on the respective corporate partners’ shares of the partnership income for that year.

Neal Armstrong. Summaries of Income Tax Folio S4-F3-C2, Provincial Income Allocation, 30 January 2024 under Reg. 402(3), Reg. 402(5), Reg. 402(4)(g), Reg. 402(4)(j). Reg. 402(7), Reg. 402(8), Reg. 402.1(1) and Reg. 402(6).