My Canadian corporation conducts business in multiple provinces. How does this affect my company’s corporate taxes?

When your company’s T2 Corporate Tax Return is filed by your professional accountant, Schedule 5 must be completed and included with the filing. Schedule 5 allocates the company’s taxable income to each province in which it’s earned. While the federal tax rate of 11% remains constant, the provincial rate tax rate will vary based on the province in which the taxable income is earned.

The Canada Revenue Agency’s website provides each provincial tax rate. More specifically, the allocation of the taxable income to each province is based on the salaries paid to employees working in each province and the revenues earned in each province.

For example, assume that your company has 2 employees in Quebec and 4 employees in Ontario, who are each paid an annual salary of $50,000. Further assume that your company’s annual gross sales are $400,000 in Quebec and $600,000 in Ontario and your company had taxable income of $200,000 in the year.

The following calculation is performed: % of Salaries in Quebec 33% % of Revenues in Quebec 40% Average of Revenues and Salaries 36.5% % of Salaries in Ontario 67% % of Revenues in Ontario 60% Average of Revenues and Salaries 63.5% Based on the above calculations, 36.5% of the taxable income will be allocated to Quebec and 63.5% of the taxable income will be allocated to Ontario.

In other words, Ontario provincial income tax will apply to $127,000 of the company’s taxable income, and Quebec provincial income tax will apply to $73,000 of the company’s taxable income. Federal income tax will apply to the entire $200,000 of taxable income.

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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