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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issue: [TaxInterpretations translation]
In a situation where Aco is associated with a corporate group in a first taxation year and, following its acquisition, is associated with a different group in the subsequent taxation year, does paragraph 125(5)(a) of the Act apply to limit Aco's available business limit for its second taxation year ending in the same calendar year?
Position:
No, but paragraph 125(5)(b) is applicable.
Reasons:
In the particular situation, the conditions of paragraph 125(5)(a) of the Act are not met since Aco is not associated with the same corporation for at least two taxation years in the same calendar year. However, Aco's business limit will be subject to paragraph 125(5)(b) of the Act for each taxation year of the corporation that is less than 51 weeks.
November 4, 2002
Jonquière Tax Centre Headquarters
Section 1235-531-1-1 N. Deslandes, CGA
(613) 957-8961
Attention: Ms. Denise Tremblay
2002-016069Request for an opinion on the small business deduction
This is in response to your fax of September 4, 2002, requesting our opinion on the above subject.
FACTS
Six corporations (Aco, Bco, Cco, Dco, Eco and Fco) were associated. Aco had a taxation year ending on December 31, 2000, while Bco, Cco and Dco all had a taxation year ending on April 30, 2000. As for Eco, you indicated that its taxation year-end was July 31, 2000. However, you have no information concerning the taxation year-end of Fco.
On February 7, 2000, control of Aco was acquired by a third party, resulting in a deemed taxation year-end under subsection 249(4) of the Income Tax Act (the "Act").
Following the February 7, 2000 acquisition, Aco was now associated with Zco, which had a December 31, 2000 taxation year-end. You have noted that during the calendar year ending December 31, 2000, Aco had two taxation years, from January 1, 2000 to the day preceding its acquisition, i.e. February 6, 2000, and from February 7 to December 31, 2000.
Aco and Zco wish to share the business limit as follows for their taxation year ending December 31, 2000: Aco will benefit from a business limit of $XXXXXXXXXX, while Zco will use an amount of $XXXXXXXXXX. You also indicated that for the taxation year ending February 6, 2000, the business limit allocated to Aco was $XXXXXXXXXX.
QUESTION
You wish to know whether paragraph 125(5)(a) of the Act will limit Aco's business limit for its taxation year ending December 31, 2000, given that it was associated with another corporate group prior to its acquisition on February 7, 2000.
OUR COMMENTS
Subsection 125(3) provides that Canadian-controlled private corporations that are associated with each other in a taxation year may file an agreement for the taxation year that allows them to assign among themselves an amount of $200,000 as a business limit.
Paragraph 125(5)(a), however, sets out certain restrictions on this allocation of the business limit where, among other things, a corporation has more than one taxation year ending in the same calendar year and it is associated in at least two of those taxation years with another corporation. The latter condition will be met if, in at least two taxation years ending in the same calendar year, a corporation was associated with the same other corporation. In this case, Aco, although it had two taxation years in the same calendar year, was not associated with the same corporation during those two taxation years. Consequently, we are of the view that paragraph 125(5)(a) does not apply in the particular situation to restrict Aco's business limit for its taxation year ending on December 31, 2000.
Aco will therefore be entitled to its business limit of $XXXXXXXXXX for the taxation year ending December 31, 2000. However, this limit will have to be pro-rated pursuant to paragraph 125(5)(b) on the basis of the number of days in the taxation year in relation to 365 to take into account its taxation year consisting of less than 51 weeks.
It should be noted that, since we had no information to this effect, we have assumed that the corporations in question were Canadian-controlled private corporations and that subsection 125(5.1) did not apply to the particular situation.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the CRA library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
We hope these comments are of assistance. Should you require any additional information regarding this matter, please do not hesitate to contact us.
Best regards,
Ghislaine Landry, CGA
Manager
Individual, Corporate
and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
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