Allocating Taxable Income for Provincial Corporate Income Taxation in Canada, 2015-2017: Practice and Analysis

The School of Public Policy Publications 2021

17 Pages Posted: 24 Mar 2021

See all articles by Michael Smart

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

François Vaillancourt

University of Montreal

Date Written: January 27, 2021

Abstract

Canada is one of the few countries in the world where an intra-country formula allocation (FA) mechanism plays an important role in the taxation of corporate income by sub national governments, that is provinces. This paper presents and analyses information prepared for its authors by CRA on the allocation of taxable income between provinces for three years: 2015, 2016 and 2017. Profits allocated using the FA approach account for about one third of taxable income. The Income tax regulations contain one general formula and nine sector specific formulas, the general one is used to allocate more than 85% of revenues between provinces. The second most important one pertains to the banking sector.

The formulae used by the CRA date back mainly to 1947 and have applied to all provinces since 1960.They have not been the object of much analysis. In particular the use of a two factor formula with weights of 50% for each of payroll and revenues has not been much discussed. The paper thus presents both the existing distribution of taxable revenues between provinces and simulates what it would be if one of alternative formulas either used in the United States or under examination in Europe was used. The three factor formula would change the distribution of taxable income significantly between provinces

Keywords: corporate income tax, formula allocation

Suggested Citation

Smart, Michael and Vaillancourt, François, Allocating Taxable Income for Provincial Corporate Income Taxation in Canada, 2015-2017: Practice and Analysis (January 27, 2021). The School of Public Policy Publications 2021, Available at SSRN: https://ssrn.com/abstract=3789215

Michael Smart

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

François Vaillancourt (Contact Author)

University of Montreal ( email )

C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada

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