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 streaming expenses can be used to circumvent the SCI rules.
Position: Likely not.
Reasons: See below.
XXXXXXXXXX 2017-070640
A. Couvrette
February 7, 2018
Dear XXXXXXXXXX:
Re: Allocating expenses to specific activities of a corporation
This is in reply to your correspondence dated May 31, 2017, wherein you requested our views on allocating expenses to specific activities of a corporation in a situation where the corporation has only one business. Within this business, the corporation earns income eligible for the “small business deduction” (SBD) and income ineligible for the SBD due to the “specified corporate income” (SCI) provisions in the Income Tax Act (“Act”). More specifically, you are asking whether expenses can be allocated to the activities generating income ineligible for SBD due to the SCI provisions in order to maximize the income eligible for the SBD.
Your correspondence also included several other scenarios involving allocating expenses to specific activities of a corporation. For the purpose of this reply, we will focus on the SCI example since the other scenarios are based on legislation that is longstanding and has not changed.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, “Advance Income Tax Rulings and Technical Interpretations.”
Section 125 of the Act provides the rules for the calculation of the SBD available to a Canadian-controlled private corporation (“CCPC”) on its income from carrying on an active business in Canada. Using the SBD, a CCPC may reduce its tax otherwise payable on such income by an amount equal to the SBD rate multiplied by the least of three amounts described in subsection 125(1).
As noted, subsection 125(1) sets out the lesser of three amounts that determines the amount of a CCPC’s SBD claim for a taxation year. In general terms, the first amount (the amount described in paragraph 125(1)(a)) is equal to the sum of the portion of the CCPC’s income from an active business carried on in Canada for a taxation year excluding certain income and exceeding certain losses. Subparagraph 125(1)(a)(i), clauses (A) to (C) indicate the portions, if any, of a CCPC’s income from an active business that are not eligible for the SBD.
In particular, clause 125(1)(a)(i)(B) refers to the portion of a CCPC’s income that is described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year. Applying a textual, contextual, and purposive approach, it is our view that the word “income” in this section refers to “net income”.
Accordingly, if expenses are disproportionately allocated when calculating the income described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year, we may need to consider if the allocation of the expenses is reasonable. Only the expenses that are reasonable to consider to be attributable to the activities generating the income described in subparagraph (a)(i) of the definition of SCI should be considered. Such a determination could only be made on a case-by-case basis having regard to all the pertinent facts and circumstances.
We trust that these comments will be of assistance.
Yours truly,
Katie Robinson, CPA, CA
Acting Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate
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