Permanent establishment (provincial tax allocation)

Part IV of the Regulations allocates a corporation’s taxable income among the provinces where it has permanent establishments. A buyer of such a business meets the term when reviewing the corporate tax returns, as with the T2 corporation income tax return.

How the Regulations work

• No permanent establishment in a province means no part of the taxable income is deemed earned there (s. 402(2))
• A permanent establishment in one province and none outside it means the whole of the taxable income is deemed earned there (s. 402(1))
• Except as otherwise provided, with establishments in and outside a province, the share depends on gross revenue reasonably attributable to the establishment and on salaries and wages paid to its employees (s. 402(3))

Deemed and excluded cases

Section 400(2) deems a permanent establishment in some situations, such as an employee or agent established in a place who has general authority to contract, or substantial machinery or equipment used in a place. A subsidiary in a place does not by itself create one. The CRA says T2 Schedule 5 is for corporations with a permanent establishment in more than one jurisdiction, or that claim provincial or territorial tax credits or rebates.

Ask the seller where the business has offices, staff, stock and equipment, and how its returns allocated income. This entry covers the federal Regulations only; check the rules where you are. Related: registering an extra-provincial corporation in Ontario.