Schedule 5. Provincial Tax Allocation
Schedule 5 (T2SCH5) allocates taxable income among provinces and territories where the corporation has a permanent establishment, determining provincial and territorial tax liability.
Federal · Updated September 23, 2026
Definition
Schedule 5 (T2SCH5), officially titled "Tax Calculation Supplementary, Corporations," allocates taxable income among the provinces and territories in which the corporation has a permanent establishment (PE). It also computes provincial tax credits and the federal tax abatement of 10% under s.124(1), which reduces federal tax for income earned in a Canadian province or territory.
File Schedule 5 if the corporation has a permanent establishment in more than one province or territory, claims provincial or territorial tax credits, or has to pay other provincial or territorial taxes covered by the schedule. A single-province CCPC with only one PE can usually skip the allocation section but may still need the schedule for credits.
Key rules
Permanent establishment (Reg 400): A fixed place of business, such as an office, branch, factory, workshop, or warehouse. A corporation also has a PE where it carries on business through an agent with general contracting authority, or where substantial machinery or equipment is used.
Allocation formula (Reg 402): For most corporations, taxable income is allocated using a two-factor average:
Revenue % = PE gross revenue in province / Total gross revenue Payroll % = PE salaries and wages in province / Total payroll Provincial allocation % = 1/2 × Revenue % + 1/2 × Payroll %
If the corporation has no gross revenue anywhere, or no salaries and wages anywhere, the remaining factor is weighted 100%. Special formulas apply to banks, trust and loan corporations, railways, airlines, bus and truck operators, pipelines, and insurance companies (Regs 403-413).
Federal abatement (s.124(1)): 10% of taxable income earned in a Canadian province or territory reduces federal Part I tax. Income earned outside Canada does not qualify. Federal tax still applies after the abatement.
Example
Maple Tech Inc. earns taxable income of $500,000 with PEs in BC and Alberta. Assume the full amount qualifies for the federal and both provincial small-business rates and that its available business limit is not reduced:
Factor BC Alberta Total Gross revenue 1,200,000 800,000 2,000,000 Salaries 300,000 200,000 500,000
BC revenue share: 1,200,000 / 2,000,000 = 60% BC payroll share: 300,000 / 500,000 = 60% BC allocation: 1/2 × 60% + 1/2 × 60% = 60% AB allocation: 1/2 × 40% + 1/2 × 40% = 40%
Taxable income allocated: BC: 500,000 × 60% = 300,000 AB: 500,000 × 40% = 200,000
Federal abatement (s.124): 500,000 × 10% = 50,000
Provincial tax at CCPC rates (SBD income assumed): BC small-business (2.0%): 300,000 × 2.0% = 6,000 AB small-business (2.0%): 200,000 × 2.0% = 4,000
Common mistakes
Excluding territorial income from the federal abatement is incorrect. The abatement applies to qualifying income earned in Canadian provinces and territories, but not outside Canada.
- Using the head-office province automatically without assessing other locations. A remote employee does not automatically create a permanent establishment; review the fixed-place, agent-authority and other regulatory tests on the actual facts.
- Including GST/HST in "gross revenue" for the allocation formula. Use revenue net of sales taxes.
- Ignoring separate provincial returns. Alberta and Quebec administer their own corporate income taxes; CRA administers Ontario corporate income tax through the T2.
- Forgetting to re-allocate when a PE opens or closes mid-year. The allocation is based on actual revenue and payroll attribution for the full year.
Official source
Related concepts
Sources
- CRA Form T2SCH5
- Income Tax Regulations Part IV (Regs 400-402)
- Income Tax Act s.124
- CRA Guide T4012
See also
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