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.
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 province.
File Schedule 5 if the corporation has a permanent establishment in more than one province or territory, claims provincial or territorial tax credits, or is subject to provincial tax in a jurisdiction outside its head office province. 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:
If either factor is zero (no revenue or no payroll), 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 province is deducted from federal tax payable, because the province (not the feds) taxes that slice. Income earned in a territory or outside Canada does not qualify for the abatement.
Example
Maple Tech Inc. earns taxable income of $500,000 with PEs in BC and Alberta:
Common mistakes
Claiming the federal abatement on income earned outside a province (in a territory or offshore). The abatement only applies to provincial income.
- Using head-office province 100% when remote employees create PEs elsewhere. Remote staff with signing authority or fixed workspaces can trigger PE status.
- Including GST/HST in "gross revenue" for the allocation formula. Use revenue net of sales taxes.
- Ignoring the Ontario, Alberta, and Quebec separate tax regimes. Alberta and Quebec administer their own corporate tax; Ontario is CRA-administered but uses CT23 equivalents via 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.
Related concepts
Authority
- CRA Form T2SCH5
- Income Tax Regulations Part IV (Regs 400-402)
- Income Tax Act s.124
- CRA Guide T4012
See also
Related entries
T2 Corporate Return Overview
Every Canadian resident corporation must file a T2 return within six months of year-end and pay any balance owing within two or three months.
BC Corporate Tax Rates
BC imposes a 2.0% small business rate on the first $500,000 of active business income for CCPCs and a 12% general corporate rate; combined with federal rates, the effective BC rates for 2026 are 11% (small business) and 27% (general).
Ontario Corporate Tax Rates
Ontario imposes a 3.2% small business rate on the first $500,000 of active business income, an 11.5% general rate, and a 10% manufacturing and processing rate under the Taxation Act, 2007 (Ontario).
This entry is for general reference. It does not constitute professional tax advice. Consult a qualified Canadian accountant for your specific situation.