15 November 2011 External T.I. 2011-0423671E5 - Expenditure Limit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether an associated foreign subsidiary's taxable income must be considered for the determination of the expenditure limit under subsection 127(10.2) of the Act.

Position: Yes.

Reasons: The definition of "associated corporation" contained in section 256 of the Act does not exclude associated foreign corporations.

XXXXXXXXXX 							2011-042367
								Charles Rafuse
								613-247-9237
November 15, 2011

Dear XXXXXXXXXX :

Re: Expenditure Limit

This is in response to your email of October 6, 2011, concerning the computation of the "expenditure limit" under subsection 127(10.2) of the Income Tax Act (the "Act") where a Canadian-controlled private corporation ("CCPC") owns all the shares of a foreign subsidiary corporation that was not incorporated in Canada or carrying on business in Canada.

You have asked whether the foreign subsidiary corporation's taxable income would have to be taken into account for the purpose of computing the CCPC's expenditure limit.

Our Comments

Subsection 127(10.1) of the Act provides an additional 15% investment tax credit ("ITC") to certain CCPCs based on the least of:

(i) the amount that the corporation claims (paragraph 127(10.1)(a)),

(ii) the corporation's Scientific Research and Experimental Development qualified expenditure pool (paragraph 127(10.1)(b)), and

(iii) the corporation's expenditure limit (paragraph 127(10.1)(c)).

The expenditure limit of a corporation for a particular taxation year is an amount as determined by the formula set out in subsection 127(10.2) of the Act. The formula includes two variables: the taxable income and the taxable capital employed in Canada of the corporation and its associated corporations, if any, for the preceding taxation year.

Section 256 of the Act provides the rules for determining whether a corporation is associated with one or more other corporations. However, the rules in section 256 do not specifically preclude a foreign corporation or a non-resident corporation from being associated with a CCPC.

Accordingly, for the purpose of determining a particular corporation's expenditure limit, that corporation must generally take into account the taxable income of all corporations associated with it whether or not such other corporations are resident in Canada or not. However, where a particular non-resident corporation is not subject to tax in Canada, it appears that there would not be any adverse impact on the particular corporation's expenditure limit under subsection 127(10.2) of the Act as a result of it being associated with that non-resident corporation.

We trust that these comments will be of assistance.

Yours truly

Michael Cooke
Acting Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch