Provincial Income Allocation Newsletter
Salaries and Wages – Inclusion of Taxable Benefits
The issue is whether all taxable benefits that are included in calculating an employee’s income for the year, such as a stock option benefit under section 7 of the Income Tax Act (the Act), are also included in “salaries and wages paid in the year” to employees for the purpose of the provincial income allocation calculations in the Income Tax Regulations (the Regulations).
One example of the allocation calculation is in subsection 402(3) of the Regulations. This provision determines the amount of a corporation’s taxable income for the year that is allocated to a particular province when a corporation has a permanent establishment in that particular province in a tax year, and a permanent establishment outside that province. The taxable income is generally allocated to a particular province based on the proportion of the corporation’s gross revenue for the year that is attributable to the permanent establishment in the province, and the proportion of the corporation’s salaries and wages paid in the year to employees of that permanent establishment. Historically, the Allocation Review Committee (ARC) Footnote 1 agreed that any taxable benefits that are not deductible in calculating the employer’s income should be excluded from salaries and wages paid in the year for provincial income allocation purposes.
ARC’s position on this matter has changed. Effective for the 2013 tax year, 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. This includes deemed amounts such as stock option benefits under section 7 of the Act, regardless of whether these benefits are deductible in calculating the employer’s income.
Part IV and Part XXVI of the Income Tax Regulations
Footnote 1 The members of the ARC include tax administrators from Alberta, Québec, Ontario and the Canada Revenue Agency (CRA) on behalf of the provinces and territories with which the CRA has tax collection agreements.(Return to footnote 1)
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