Income Tax Folio S4-F3-C2, Provincial Income Allocation, 30 January 2024

Interpretation of gross revenue, and examples

2.22 … By virtue of section 16 of the Interpretation Act, this definition of gross revenue [in s. 248(1)] also applies for purposes of the Regulations.

2.21 For purposes of Part IV of the Regulations, gross revenue includes all amounts received or receivable by a taxpayer, other than on account of capital. In addition, any amounts that are included in income pursuant to paragraphs 12(1)(a) or (b) would also be considered gross revenue for purposes of Part IV of the Regulations. Gross revenue of a corporation would typically include amounts received by the corporation from its principal business operations as well as other amounts received or receivable that a corporation considers incidental to its business operations. …

2.22 Examples of amounts that would normally be included in determining gross revenue of a corporation for purposes of Part IV of the Regulations are:

• Sales of goods or merchandise by a corporation. Similarly, revenue for services rendered by a corporation.
• Interest earned on bank accounts and trade receivables.
• Foreign exchange gains, where the gains are on income account.
• Proceeds received on the disposition of property that was included in the inventory of a business upon the disposition of or ceasing to carry on the business.

… [A]n amount received or receivable as proceeds of disposition of a capital property and any consequential income inclusions under sections 13 or 38 on the disposition is excluded from gross revenue.

Exclusion of expenditure-related amounts from gross revenue

2.26 Examples of amounts that would normally be excluded in determining gross revenue of a corporation for purposes of Part IV of the Regulations include the following:

• Amounts received or receivable in respect of expenditures incurred by the corporation.
• Amounts received or receivable as volume rebates as these amounts would normally relate to expenditures incurred instead of receipts in respect of income-earning activities.
• Financial assistance received by the corporation from a government in respect of expenditures incurred or to be incurred by the taxpayer.

Meaning of salaries and wages

2.56 The expression salaries and wages has the same meaning as the definition of “salary or wages” in subsection 248(1) of the Act. Furthermore, “salaries and wages” should be read in conjunction with the phrase “paid in the year by the corporation”.

2.57 The phrase salaries and wages paid in the year by the corporation incorporates all remuneration that is calculated under subdivision a of Division B of Part I of the Act. Such salaries and wages paid refers to the income inclusions of an employee under sections 5, 6, and 7. Deductions available to an employee under section 8 are not taken into account.

2.58 Furthermore, salaries and wages paid in the year by a corporation to employees of a permanent establishment in a province includes salaries and wages paid to non-resident employees who report for work at that permanent establishment.

2.59 For the purposes of the allocation of taxable income, the following list describes some of the amounts that are not included in the calculation of salaries and wages paid in the year by the corporation to employees:

• Employer’s Canada Pension Plan contributions and Employment Insurance premiums
• Employer contributions to the Quebec Pension Plan, and the Quebec Parental Insurance Plan
• Payments of superannuation and pensions benefits
• Retiring allowances as defined under subsection 248(1) of the Act, which includes amounts in respect of a loss of an office or employment
• Unpaid bonuses
• Provincial worker’s compensation benefits
• Deductions available to the employee under section 8

Sharing where a joint venture

2.74 Where a corporation is a participant in a joint venture, the determination of salaries and wages paid by the corporation from the joint venture activities will generally depend on the terms of the joint venture agreement. For example, where, pursuant to the joint venture agreement, the participants agree to share legal responsibility for the salaries and wages of the employees of the joint venture, the participants would include their proportionate share of the salaries and wages of the joint venture for purposes of determining salaries and wages paid by the corporation as set out in subparagraph 402(3)(a)(ii) of the Regulations.

CRA broad interpretation of Reg. 402(5) exclusion

2.23 Subsection 402(5) of the Regulations provides that for purposes of subsection 402(3), gross revenue of a corporation does not include interest on bonds, debentures or mortgages, dividends on shares of capital stock, or rentals or royalties from property that is not used in connection with the principal business operations.

2.24 In Provincial Income Allocation Newsletter No. 1 the CRA confirmed that a broad interpretation of the excluded amounts is appropriate for the purposes of Part IV of the Regulations. Under such a broad interpretation, interest on promissory and other notes, bankers’ acceptances, intercompany loans, certificates, guaranteed investment certificates, and any unsecured debt instruments or other similar obligations would also be excluded from the gross revenue of a corporation.

2.25 In addition, the reference in subsection 402(5) to “that is not used in connection with the principal business operations of the corporation” refers only to “rentals or royalties from property” and not to the other items enumerated in that subsection.

Extension of gross revenue definition to Pt. IV of the Regs.

2.22 … By virtue of section 16 of the Interpretation Act, this definition of gross revenue [in s. 248(1)] also applies for purposes of the Regulations.

Exclusion of expenditure-related amounts from gross revenue

2.26 Examples of amounts that would normally be excluded in determining gross revenue of a corporation for purposes of Part IV of the Regulations include the following:

• Amounts received or receivable in respect of expenditures incurred by the corporation.
• Amounts received or receivable as volume rebates as these amounts would normally relate to expenditures incurred instead of receipts in respect of income-earning activities.
• Financial assistance received by the corporation from a government in respect of expenditures incurred or to be incurred by the taxpayer.

Inclusion of ancillary revenues

2.48 In allocating gross revenue from services, a corporation must determine the place where those services were performed. Where a corporation renders services from permanent establishments in more than one jurisdiction, the gross revenue from the services is attributed to each jurisdiction and should recognize the value of any ancillary services rendered by the permanent establishment.

Revenue from operating leases allocated based on reasonable knowledge

2.52 [W]here the land is not used in connection with the corporation’s principal business operations, subsection 402(5) of the Regulations excludes the rental revenue from property from the corporation’s gross revenue.

2.53 Gross revenue of a corporation from non-financial leases (generally, these are operating leases) should be allocated in the following manner:

1. Gross revenue should be attributed to the permanent establishment in the province in which the leased property is being used, where the corporation has reasonable knowledge of such information.
2. 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 in … (a), the gross revenue should be allocated to the permanent establishment to which the person negotiating the lease may reasonably be regarded as being attached.

2.54 Regarding reasonable knowledge, the corporation may have knowledge of the location where the leased property is being used simply by virtue of the relationship with the client. This alone is not necessarily the prerequisite for reasonable knowledge. Gross revenue should be allocated to the jurisdiction where the leased property is being used only if the corporation needs to have this information because of the commercial or business relationship with the client, and only if the corporation has a permanent establishment in that jurisdiction. See Provincial Income Allocation Newsletter No. 3.

Meaning of “normally”

2.63 The term normally is not defined for the purposes of subsection 402(7) of the Regulations. It is the CRA’s view that the term “normally” in subsection 402(7) has two conditions:

• 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.

For example, where a corporation’s employees usually perform a certain service for the corporation but for some reason, such as short-term economic conditions or labour problems, the corporation entered into an agreement with a service provider to perform such service, the fee paid to the service provider would be deemed to be salary paid in the year by the corporation. In addition, the portion of the fee paid that may reasonably be regarded as a payment in respect of services rendered at a particular permanent establishment of the corporation is deemed to be salary paid to an employee of that establishment.

Meaning of “commission”

2.64 Under subsection 402(8) of the Regulations, for the purposes of subsection 402(7), a fee does not include a commission paid to a person who is not an employee of the corporation. The word commission in the context of subsection 402(7) has been defined by the courts to mean a fee determined as a percentage of some given amount.

Non-application of central paymaster rule to admin services

2.66 Generally, the central paymaster rules would not apply in a situation where the services in question are shared administrative (that is, non-operational) services. For the purposes of section 400 of the Regulations, the salaries and wages of a parent corporation’s employees providing shared administrative services will be part of the parent’s salaries and wages paid in the year if:

• those employees report to a PE of the parent;
• those employees receive direction from the parent's corporate structure; and
• all or substantially all of the economic activity of those employees (in this case, providing services to a subsidiary) is for the benefit of the parent.

Example of application to services provided under active direction of sub 2.69 …

Example 3 – Central paymaster rules

Corporation A provides services to …[its subsidiary] Corporation B … of a type that could reasonably be expected to be performed by employees of the Corporation B in the ordinary course of its business. In this regard, Employees of Corporation A report to a permanent establishment of Corporation B, receive direction from Corporation B’s corporate structure, and all or substantially all of the Employees’ economic activity is for the benefit of Corporation B. …

For the purposes of Part IV of the Regulations the salaries and wages of Corporation A’s Employees would be attributed to Corporation B’s salaries and wages paid in the year.

Allocation under Reg. 402(6) in accordance with income-sharing percentage

2.71 Each member of a partnership is considered to have a permanent establishment in the province(s) in which the partnership has a permanent establishment. When a corporation conducts all or part of its operations in partnership with one or more other persons, subsection 402(6) of the Regulations provides that for the purposes of subsection 402(3) … the corporation must include in its gross revenue for the tax year and in its salaries and wages paid in the tax year its proportionate share of the gross revenue of the partnership and the salaries and wages paid by the partnership. The corporation’s proportionate share of these amounts from the partnership’s fiscal period ending in (or coinciding with) the corporation’s tax year is based on the corporation’s share of the partnership’s income or loss for the fiscal period of the partnership.