Tax and Revenue Administration Alberta Corporate Tax Act Interpretation Bulletin CTIB-3

CTIB-3 / November 1996

ALBERTA CORPORATE TAX ACT INTERPRETATION BULLETIN:
ALLOCATING INCOME AMONG PERMANENT ESTABLISHMENTS

This Interpretation Bulletin discusses the basis on which taxable income is allocated among permanent establishments. The topics included are:

• General Allocation Rules
• Attributable Gross Revenue
• Attributing Gross Revenue
• Allocable Salaries and Wages
  • "Central Paymaster"
• Allocating Salaries and Wages

GENERAL ALLOCATION RULES

1. 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 its amount taxable in Alberta for that taxation year as calculated under the Act. Interpretation Bulletin CTIB-1 provides a general discussion on when a corporation has or is deemed to have a permanent establishment in Alberta. The federal Income Tax Act (the "federal Act") states that the amount of taxable income of a corporation earned in a year in a particular province is determined in accordance with Part IV of the Regulations to that Act.
   
   
2. If a corporation has a permanent establishment in only one jurisdiction, all of its taxable income is allocated to that jurisdiction.
   
   
3. If a corporation does not have a permanent establishment in a particular jurisdiction, none of its taxable income is allocated to that jurisdiction.
   
   
4. When a corporation has a permanent establishment in more than one jurisdiction, it must allocate to each of these jurisdictions, the taxable income earned in that jurisdiction. Regulation 402(3) provides a general formula for determining this allocation. A corporation must use this calculation to determine the allocation to each jurisdiction unless it is a corporation described in paragraph 7 below. The amount allocated to Alberta for a taxation year would be:

   1/2 [(A/B x TI) + (C/D x TI)]

   where:

   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; and

   TI = taxable income for the year for Alberta purposes.

   These terms will be discussed in greater detail in subsequent paragraphs.

5. 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.
   
   
6. If allocable gross revenue for the year is nil, the amount taxable in Alberta is then calculated as:

   C/D x TI

   Correspondingly, if allocable salaries and wages for the year is nil, the amount taxable in Alberta is calculated as:

   A/B x TI

7. If the corporation is one of the following types of corporations, it cannot allocate its taxable income using the general formula described in paragraph 4. It must calculate its allocation using the formula described in the Regulations for that type of business. A discussion of these provisions has not been provided in this circular. These corporations and the applicable Regulations are:
   
   

   Regulation	To be used by:
   403	Insurance Corporations
   404	Chartered Banks
   405	Trust and Loan Corporations
   406	Railway Corporations
   407	Airline Corporations
   408	Grain Elevator Operators
   409	Bus and Truck Operators
   410	Ship Operators
   411	Pipeline Operators
   412	Divided Businesses
   413	Non-Resident Corporations

ATTRIBUTABLE GROSS REVENUE

8. If the corporation is a member of a partnership, the proportion of total gross revenue of the partnership that is the corporation's share of the profit or loss of the partnership is included in allocable gross revenue.
   
   
9. Subsection 402(5) of the federal Regulations specifically excludes the following from allocable gross revenue:

   a) interest on bonds, debentures or mortgages;

   b) dividends on shares of capital stock; and

   c) rentals or royalties from property that is not used in connection with the principal business operations of the company.

   Revenue from any other sources not specifically excluded under this Regulation must be included in allocable gross revenue. For example, interest from term deposits or savings accounts would be included in allocable gross revenue. Gross rental revenue not excluded under Regulation 402(5) must be included in allocable gross revenue.

10. The following are examples of items which can affect allocable gross revenue:

    a) items which should be included in allocable gross revenue:

    • revenue from the sale of scrap or other miscellaneous items; and
    • foreign exchange gains and losses if the item on which the gain or loss was incurred relates to revenue and is not capital in nature;

    b) items which should be deducted from allocable gross revenue:

    • sales returns; and
    • volume discounts to customers;

    c) items which should not be deducted from allocable gross revenue:

    • early payment discounts to customers;
    • royalties paid to the crown; and

    d) items not included in allocable gross revenue:

    • volume discounts received from suppliers;
    • early payment discounts from suppliers;
    • reimbursement of expenses; and
    • GST and provincial sales taxes collected.

ATTRIBUTING GROSS REVENUE

11. Gross revenue is attributed to the jurisdiction in which it is reasonably considered to have been earned. In some instances, this determination may be difficult. The Regulations provide some rules to determine in which jurisdiction certain types of revenue are considered to be earned. These rules are discussed in the following paragraphs.
    
    
12. One set of rules concerns the destination of a shipment of merchandise that is sold to a customer. These rules are:

    a) If the destination of merchandise is to a customer who is in a province or a country other than Canada in which the taxpayer has a permanent establishment, the revenue is allocated to that jurisdiction.

    b) If the taxpayer ships merchandise that it has manufactured or produced to a customer in a country where the taxpayer does not have a permanent establishment, gross revenue is allocated:

    (i) to the province in which the merchandise was produced or manufactured by the taxpayer; or

    (ii) based on salaries and wages paid to employees of each of the permanent establishments where the merchandise was partly produced or manufactured by the taxpayer if the merchandise was produced or manufactured by the taxpayer in more than one province.

    c) If the destination of the merchandise is a province or a country other than Canada in which the taxpayer has no permanent establishment, the revenue is generally allocated to the permanent establishment of the taxpayer in which the sale was negotiated. Paragraph (b) above describes exceptions to this rule.

    d) If a customer requests that merchandise be shipped to some other person, the allocation of revenue depends upon the location of the customer's office with which the sale was negotiated. The fact that the vendor may have a permanent establishment in the jurisdiction in which the recipient of the merchandise is located is not relevant to the allocation issue. The following describes the allocation of gross revenue in these situations.

    (i) If the customer's office is located in a province or in a country other than Canada in which the taxpayer has a permanent establishment, the revenue is allocated to that province or country in which the customer's office is located.

    (ii) If the customer's office is located in a country other than Canada in which the taxpayer does not have a permanent establishment and if the product is produced or manufactured by the taxpayer, the revenue will be allocated according to the rules in (b)(i) and (ii) above.

    (iii) If the customer's office is located in a country other than Canada in which the taxpayer does not have a permanent establishment, and if the product is not produced or manufactured by the taxpayer, the revenue is allocated to the permanent establishment of the taxpayer where the sale was negotiated.

    (iv) If the customer's office is located in a province in which the taxpayer does not have a permanent establishment, the revenue is allocated to the permanent establishment of the taxpayer where the sale was negotiated.

13. 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 delivery point (as shown on source documents) must be considered.
    
    
14. If a corporation renders services in a province in which it has a permanent establishment, the gross revenue from those services is allocated to that province. If the services are rendered in a province in which the corporation does not have a permanent establishment, the revenue is allocated to the permanent establishment in which the contract was negotiated.
    
    
15. Revenue derived from investments is allocated to the permanent establishment in which the investments are administered. Revenue from the rental of real property is allocated to the permanent establishment in which the property is located. Revenue from the rental of property such as equipment is allocated to the permanent establishment in which the lease was negotiated.

ALLOCABLE SALARIES AND WAGES

16. Allocable salaries and wages includes amounts paid in the taxation year to employees of the corporation.
    
    
17. Taxable benefits included in an employee's income and allowed as a deduction to the corporation are to be included in allocable salaries and wages. Amounts such as the employer's share of Canada Pension Plan contributions, Unemployment Insurance contributions and pension plan contributions are not included in allocable salaries and wages.
    
    
18. If the corporation is a member of a partnership, the proportion of total salaries and wages of the partnership that is the same as the corporation's share of the profit or loss of the partnership is included in allocable salaries and wages.
    
    
19. Fees paid to directors who are not employees of the corporation and commissions paid to persons who are not employees of the corporation are not included in salaries and wages.
    
    
20. 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.

    "Central Paymaster"

21. In some situations, one corporation in a related group of companies acts as the central paymaster ("paymaster") for one or several other corporations in the group. The paymaster is reimbursed directly for the salaries and wages paid to the persons performing duties for the other corporation (the "employer corporation") or receives a service fee which compensates the paymaster for the salaries and wages that it has paid on behalf of the employer corporation. Although the person gets a cheque from the paymaster, he performs his duties for the employer corporation.
    
    
22. Attributing salaries and wages to the corporation that issues the cheques and T4's would not reflect true employer/employee relationship in this case and this relationship must be established (see paragraph 23). Once this is established, the amount paid to a person as evidenced on the T4's, regardless of who prepared those T4's, should be used as a basis of allocating salaries and wages to the actual employer. As T4's are prepared on a calendar year basis, adjustments must be made for fiscal periods that do not coincide with calendar years.
    
    
23. It is necessary to look at the economic reality of the situation. The following questions should be used as guidelines to make this determination.

    a) Who controls the employee? (Control includes the legal authority to hire or fire and the power of deciding the work to be done, the way it is to be done, the means by which it will be achieved, and the time and place where it will be done.)

    b) Where does the person report to work?

    c) Which corporation, if any, has an employment contract with the person that represents the true relationship between the employer and employee?

    If the answers to these questions show that a person performs all or substantially all of his services for a particular corporation (which may or may not be the payor), he would normally be considered an employee of that corporation for allocation purposes. None of the above guidelines are sufficient by themselves to characterize the existence of an employer/employee relationship.

ALLOCATING SALARIES AND WAGES

24. Salaries and wages are allocated to the permanent establishment to which the employee normally reports to work. The fact that an employee may sometimes be required to travel to other jurisdictions does not alter this allocation.
    
    
25. Head office administration salaries and wages are allocated to the jurisdiction where the head office is located.