By Dawn Loeffler
What is a schedule 5 as part of a T2 corporate tax return?
Schedule 5 allocates the taxable income of a corporation amongst the provinces of Canada in which it has a permanent establishment so that provincial tax rates are correctly applied.
If your business operates with a permanent establishment (please see FAQ # 127 for what constitutes a permanent establishment) in more than one province, your taxable income must be allocated amongst these applicable provinces.
Taxable income is allocated amongst these provinces using schedule 5. This allocation includes a calculation using gross revenues and salary and wages paid that are applicable to each province.
A corporation’s proportion of salaries and wages paid within a province of permanent establishment is compared to the total salaries and wages paid and then added to the proportion of gross revenues from that same province compared to the total gross revenues. This number is then averaged and used to allocate taxable income to that province.
For example, a corporation with a permanent establishment in BC and in Ontario:
- Wages of $500,000 in Ontario and total wages are $2,000,000.
- Gross revenues of $1,000,000 in Ontario and total gross revenues are $10,000,000.
The formula for allocating taxable income would be ($500,000/$2,000,000 +$1,000,000/$10,000,000)/2 or 17.5% of taxable income would be taxed in Ontario. The remaining 82.5% would be taxed in BC.
In BC, the provincial corporate tax low rate is currently 2% lower than it is in Ontario. Therefore, the provincial location of permanent establishments and allocation of taxable income can have a significant impact on your corporate taxes owing. A good thought for tax planning is to control where you have a permanent establishment. You should also think about how you would allocate profits versus how schedule 5 allocates profits. Your allocation might save you taxes, but not fit in the rules of how schedule 5 works.
Call us at Gilmour Knotts Chartered Professional Accountants to learn more about provincial permanent establishments, how to minimize your provincial taxes and strategies to allocate profits differently than Schedule 5 might allocate profits.
Dawn Loeffler, BA (Hons), CPA, CA is the International Tax Partner of Gilmour Knotts Chartered Accountant. To connect with Grant visit: www.gilmour.ca
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