45 How is a ‘permanent establishment’ determined and how does it impact the provincial abatement?
Aneesh Dhaumya
The permanent establishment of a corporation is usually a fixed place of business in a province or territory. This can include an office, branch, oil well, farm, timberland, factory, workshop, warehouse, or mine. Sometimes the corporation does not have a fixed place of business. In this case, the permanent establishment is the place in which the corporation conducts business the most.
If the corporation conducts business through an employee or an agent who is established in a particular place, it is considered to have a permanent establishment in that place if the employee or agent can contract for the corporation, or regularly fills orders received on merchandise owned by the corporation.
A corporation is eligible for the 10% federal tax abatement on income that is earned within Canada. This federal abatement is intended to reduce your federal tax and provide room for provincial taxation. As a result, income earned outside Canada is not eligible for this abatement.
If the corporation has permanent establishments in more than one province or territory, the corporation’s allocation of taxable income is calculated by first calculating the percentage of revenue incurred in one province or territory relative to the total revenue earned by the corporation, then adding this number to the percentage of salaries and wages incurred in the same province or territory relative to the total salaries and wages incurred by the corporation, and then dividing the sum of both numbers by two. The result is the percentage that is used to allocate the total taxable income to that province or territory. After repeating this process for every province or territory the corporation has a permanent establishment in, the taxable income of the corporation should be proportionately allocated to every province or territory that is appropriate. The total taxable income earned in provinces and territories is subject to the 10% abatement, which is a deduction on the corporation’s tax payable.
For example, suppose Fake Business Limited has permanent establishments in BC, Alberta, and California, and the company has taxable income of $150,000. The company’s taxable income would be attributed to each province as follows
| Gross Revenue($) | Gross Revenue(%) | Salaries ($) | Salaries (%) | Average % | |
| BC | $ 250,000 | 33.8% | $ 75,000 | 35.7% | (33.8% + 35.7%) / 2 = 34.75% |
| Alberta | $ 315,000 | 42.6% | $ 85,000 | 40.5% | (42.6% + 40.5%) / 2 = 41.55% |
| Subtotal | $ 565,000 | 76.4% | $ 160,000 | 76.2% | (76.4% + 76.2%) / 2 = 76.3% |
| California | $ 175,000 | 23.6% | $ 50,000 | 23.8% | |
| Total | $ 740,000 | 100% | $ 210,000 | 100% |
The taxable income of $150,000 is then allocated as follows:
BC: 34.75% of $150,000 = $ 52,125
Alberta: 41.55% of $150,000 = $ 62,325
Total taxable income earned in a province or territory = $ 114,450
The abatement is calculated as $114,450 x 10% = $11,445, and the remaining $35,550 (i.e., $150,000 – $114,450) of taxable income is not eligible for the abatement because this income was not earned in a province or territory in Canada.
Alternative calculation:
Another option is to change the abatement rate rather than the taxable income. In the example above 76.3% of the taxable income will be allocated to provinces in Canada. Therefore you can calculate the abatement as follows:
10% fed abatement X 76.3% = 7.63% adjusted federal abatement
7.63% adjusted fed abatement X $150,000 TI = $11,445
Interactive content (Author: Gurkaran Sidhu, January 2020)
Interactive content (Author: Gurleen Kaur, January 2020)
References and Resources:
- Article – “T2 Corporation – Income Tax Guide – Chapter 8: Page 8 of the T2 return” (Author: Government of Canada)
- Article – “T2 Corporation – Income Tax Guide – Chapter 7: Page 7 of the T2 return” (Author: Government of Canada)
January 2020
