Income Tax Technical News No. 44, 14 April 2011
Can CRA comment on the “reasonably be expected” test where the corporation that is the recipient of the services has never performed the particular services and functions itself (for example, where it has never had its own legal staff, and it receives legal services from its parent corporation); or where the services in question are shared administrative (that is, non-operational) services where the corporation does not require the full-time services of any particular employees of the related service provider? CRA responded:
The fact that the subsidiary has never had its own legal staff is irrelevant. If employees of the parent corporation (a master-servant relationship) report to a PE of a subsidiary, receive direction from the subsidiary’s corporate structure, and all or substantially all of their economic activity is for the benefit of the subsidiary, then for the purposes of regulation 400 the salaries and wages of the employees would be allocated to the subsidiaries’ gross salaries and wages paid in the year and deducted from the parent’s gross salaries and wages paid in the year.
Generally, in a situation where the services in question are shared administrative (that is, non-operational) services, regulation 402.1 would not apply. If employees of the parent corporation report to a PE of a parent, receive direction from the parent’s corporate structure, and all or substantially all of their economic activity is for the benefit of the parent, which in this case is providing a service to a subsidiary, then for the purposes of regulation 400 the salaries and wages of those employees would be that of the parent’s gross salaries and wages paid in the year.
The interpretation of “normally” for regulation 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. It is the CRA’s position that regulation 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.
Where the corporation never had its own employees performing the legal services, those services would not be services that were previously performed by the corporation’s employees, and therefore regulation 402(7) would not apply. Where the services provided (shared administrative services) are not short‑term or temporary, they would not meet the definition of “normally.”
Brian Robson, "Provincial Income Allocation", Canadian Tax Highlights, Vol. 24, No. 8, August 2016, p. 3
Only applies if paymaster corp's employees spend 90% of their time on the related corp's activity (p. 3)
The central-paymaster provision in regulation 402.1 and the outsourcing provision in regulation 402(7) aim to ensure that the first prong of provincial income allocation [of relative payroll] is unaffected if the business has one corporation (Payco) handle payroll for the group for the sake of administrative convenience or if an employment agency fulfills functions that used to be performed by the corporation's employees. Perhaps, contrary to the logic and wording of the central-paymaster provision, the CRA's provincial income audit practices take the restrictive view that the provision only applies if Payco's employees spend at least 90 percent of their time on the related corporation's economic activity. Thus, two sister corporations that share vital operational functions equally do not include their share of relevant salaries and wages from those functions when determining income attributable to a province if a third corporation in the group acts as central paymaster. Regulation 402.1 does not contain an "all or substantially all" condition, but the CRA supports its position by reference to the hypothetical situation described in Income Tax Technical News no. 44, which appears to be based on non-operational services….
A partnership is the legal employer, with Corp 1 having a 30% partnership interest, and Corp 2 having a 70% partnership interest. The corporation for which the services are performed (the “benefiting corporation”) is not a member of the partnership. Is the partnership a person for purposes of Reg. 402.1(5)? CRA responded:
Subsection 402.1(5) deems a partnership to be a corporation for the purposes of the central paymaster rules. … As a result, the rules in section 402.1 will apply such that the salary or wages earned by an employee of a partnership for the performance of services in a particular province for a benefiting corporation are deemed to be salary or wages paid by the benefiting corporation to an employee of its permanent establishments in the province if the benefiting corporation and the partnership do not deal at arm’s length and the benefiting corporation has a permanent establishment in the province.
In addition, under subsection 402.1(3) … the amount of salaries and wages paid in a taxation year by the partnership employer that is deemed to be paid by the benefiting corporation is deducted from the partnership employer’s salaries and wages paid in the taxation year. … As a result, for the purposes of subsection 402(6), the salaries and wages paid that are allocated to the members of the partnership (Corp 1 and Corp 2) would not include the salaries and wages paid that are deemed by subsection 402.1(3) to be paid by the benefiting corporation.
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|Tax Topics - Income Tax Regulations - Regulation 402 - Subsection 402(6)||exclusion from payroll allocated to partners for Reg.402(6)||170|