Dual tax rates – Example 2

Income earned in more than one province or territory

When you allocate taxable income to more than one province or territory, you also have to allocate proportionally any income eligible for the small business deduction.

Example

Corp Y has permanent establishments in both Newfoundland and Labrador and the Yukon. Its tax year runs from July 1, 2018, to June 30, 2019.

Corp Y claimed the small business deduction when it calculated its federal tax payable.

The lower rate of tax for Newfoundland and Labrador is 3%, and the higher rate of tax is 15%.

To calculate its Newfoundland and Labrador income tax, Corp Y does the following calculations:

Taxable income allocated to Newfoundland and Labrador (from Schedule 5)
\$60,000
Taxable income allocated to the Yukon (from Schedule 5)
+ \$30,000
Total taxable income earned in Canada
= \$90,000
Least of lines 400, 405, 410, and 427 (line 428 instead of 427 for tax years starting after 2018) from the T2 return in the federal small business deduction calculation
\$78,000
Income eligible for the federal small business deduction attributed to Newfoundland and Labrador: (\$60,000 ÷ \$90,000) × \$78,000
= \$52,000
Taxable income earned in Newfoundland and Labrador
\$60,000
Minus: Income eligible for the federal small business deduction attributed to Newfoundland and Labrador
− \$52,000
Amount taxed at higher rate
= \$8,000
Taxes payable at higher rate: \$8,000 × 15%
\$1,200
Taxes payable at lower rate: \$52,000 × 3%
\$1,560
Newfoundland and Labrador tax payable
= \$2,760

To calculate its Yukon income tax payable, Corp Y would repeat the same steps, using the rates that apply.

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