Allocating taxable income for provincial corporate income taxation in Canada, 2015-2017: practice and analysis

  • Michael Smart
  • Francois Vaillancourt University of Montreal


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

Briefing Papers