Under a new administrative position, all taxable benefits that are included in calculating an employee's income for the year—including deemed amounts such as stock option benefits—are included in salaries and wages paid in the year to employees for purposes of the provincial income allocation calculations in the Income Tax Regulations.
A corporation that has a permanent establishment (PE) in more than one province must allocate its taxable income for the year between those provinces under the Income Tax Regulations (e.g., Regulation 402 (3)).
The taxable income is generally allocated to a province based on the proportion of the corporation's gross revenue for the year that is attributable to the PE in the province and the proportion of the corporation's salaries and wages paid in the year to employees of that PE.
Any double tax issues that arise when provincial tax authorities cannot agree on a corporation's income allocation are resolved by the Allocation Review Committee (ARC), which functions as a type of provincial "competent authority.” The committee is comprised of senior people from the tax authorities of Alberta, Ontario, Quebec and the Canada Revenue Agency (CRA) on behalf of the provinces with which the CRA has tax collection agreements.
New position on non-deductible taxable benefits
Historically, the ARC agreed that any taxable benefits that are not deductible in calculating the employer's income are to be excluded from salaries and wages paid in the year for provincial income allocation purposes.
The CRA recently announced that ARC's position on this matter has changed. As such, the amount of salaries and wages paid in the year for the purpose of the provincial income allocation calculations will include all taxable benefits that are to be included in the employees' income in the year, effective for the 2013 tax year. These taxable benefits include deemed amounts, such as stock option benefits under section 7 of the Income Tax Act, regardless of whether these benefits are deductible in calculating the employer's income.
Read an April 2013 report prepared by the KPMG member firm in Canada: Provincial Allocation Now Includes All Taxable Benefits