CO-771.R.3, Breakdown of Business Carried On in Québec and Elsewhere

A corporation that has an establishment in Québec at any time in a taxation year must pay, for that year,

• income tax on its taxable income,
• tax on its paid-up capital, and  
• compensation tax on its paid-up capital, in the case of a bank, loan corporation, trust corporation or corporation trading in securities that is both subject to Part IV of the Taxation Act and a financial institution.

However, if such a corporation also has an establishment outside Québec,

• the income that takes into account the foreign tax credit is equal to its income determined on line 36 of form CO-771,
• the Québec income tax payable is equal to its income tax determined on line 420d of form CO-17,
• the tax on capital payable is equal to its tax on capital determined on line 427a of form CO-17,
• the compensation tax is equal to its compensation tax calculated on line 16 of form CO-1159.2,

multiplied by the proportion of business carried on Québec, in relation to the total business (i.e., the business carried on in Québec, other jurisdictions in Canada, and elsewhere).

This proportion corresponds to half of the aggregate of

1. the ratio between the corporation’s gross revenue for the year reasonably attributable to any establishment(s) in the province or territory or outside Canada and the corporation’s total gross revenue for the year;
2. the ratio between the salaries and wages paid by the corporation during the year to employees of any establishment(s) in the province or territory or outside Canada and the total salaries and wages paid by the corporation during the year.

22, 27, 771 para. 2, 1131, 1133 and 771R3*

Generally speaking, the proportion of business carried on in Québec by a corporation is based on the ratio between the wages paid by the corporation to employees of its establishments in Québec and the total wages paid by the corporation.

To determine the proportion of business carried on in Québec, the amount that can reasonably be considered the salary or wages earned by an employee for services rendered in Québec to (or for the benefit of) a corporation that is not his or her employer is deemed to be salary or wages paid by the corporation to an employee of an establishment of the corporation in Québec, for the corporation’s taxation year in which the salary or wages are paid to the employee by his or her employer.

This presumption applies to services that are rendered by an employee, in the ordinary course of employment with his or her employer, to (or for the benefit of) a corporation, in the course of the regular and usual activities involved in the operation of a business by the corporation, provided the services are of the same nature as those rendered by employees of entities that carry on the same type of business as the corporation.

However, this presumption does not apply with regard to a taxation year if, in the opinion of the Minister of Revenue,

• the agreement under which the services are rendered by the employee to the corporation or for its benefit, or
• another agreement that affects the amount of salaries or wages paid by the corporation and that the Minister of Revenue considers to be related to the agreement for providing services,

was not made or maintained in force for the purpose of reducing the total of the income tax and other taxes payable in Québec by the corporation and the employer.