Income Tax Regulations

402.1 (1) In this Part, if an individual (referred to in this section as the “employee”) is employed by a person (referred to in this section as the “employer”) and performs a service in a particular province for the benefit of or on behalf of a corporation that is not the employer, an amount that may reasonably be regarded as equal to the amount of salary or wages earned by the employee for the service (referred to in this section as the “particular salary”) is deemed to be salary paid by the corporation to an employee of the corporation in the corporation’s taxation year in which the particular salary is paid if

• (a) at the time the service is performed,

  • (i) the corporation and the employer do not deal at arm’s length, and

  • (ii) the corporation has a permanent establishment in the particular province;

• (b) the service

  • (i) is performed by the employee in the normal course of the employee’s employment by the employer,

  • (ii) is performed for the benefit of or on behalf of the corporation in the ordinary course of a business carried on by the corporation, and

  • (iii) is of a type that could reasonably be expected to be performed by employees of the corporation in the ordinary course of the business referred to in subparagraph (ii); and

• (c) the amount is not otherwise included in the aggregate, determined for the purposes of this Part, of the salaries and wages paid by the corporation.

(2) In this Part, an amount deemed under subsection (1) to be salary paid by a corporation to an employee of the corporation for a service performed in a particular province is deemed to have been paid,

• (a) if the service was performed at one or more permanent establishments of the corporation in the particular province, to an employee of the permanent establishment or establishments; or

• (b) if paragraph (a) does not apply, to an employee of any other permanent establishment (as is reasonably determined in the circumstances) of the corporation in the particular province.

(3) In determining under this Part the amount of salaries and wages paid in a year by an employer, there shall be deducted the total of all amounts each of which is a particular salary paid by the employer in the year.

(4) Despite subparagraph (1)(a)(i), this section applies to a corporation and an employer that deal at arm’s length if the Minister determines that the corporation and the employer have entered into an arrangement the purpose of which is to reduce, through the provision of services as described in subsection (1), the total amount of income tax payable by the corporation under a law of the particular province referred to in subsection (1).

(5) For the purposes of this section, a partnership is deemed to be a corporation and the corporation’s taxation year is deemed to be the partnership’s fiscal period.