31 January 2012 Internal T.I. 2011-0406831I7 - Composition of a Corporation's Instalment Base

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 Part VI.1 tax should be part of the instalment base of the transferor or transferee when calculating estimated tax payable for the current year.

Position: Transferee.

Reasons: The amount payable under section 157 is determined by reference to an instalment base, which is defined to mean the aggregate of amounts payable under Parts I, I.3, VI, and XIII.1 by the corporation for its taxation year preceding the particular taxation year. A corporation that was required to pay Part VI.1 tax in its preceding year would have to include that tax in its instalment base when calculating the estimated taxes payable for the current year.

								January 31, 2012

	Business Accounting Division			HEADQUARTERS
								Income Tax Rulings
	Attention: Kathleen McCaffrey			  Directorate
		Business Accounting Programs		Lindsay Frank
		Business Accounting Division		(613) 957-2097

								2011-040683

Composition of a Corporation's Instalment Base

We are replying to your request for an interpretation of section 157 of the Income Tax Act, specifically regarding the composition of the instalment base of a corporation.

In the example you provided, a corporation entered into an agreement with a related corporation to assume responsibility for paying the latter's liability for Part VI.1 tax. The agreement was evidenced by the filing of Schedule 45, "Agreement Respecting Liability for Part VI.1 Tax", and Schedule 43, "Calculation of Parts IV.1 and VI.1 Taxes". The issue in this interpretation is whether the corporation must include the Part VI.1 tax when calculating its estimated taxes for the year.

Under subsection 191.3(1), a corporation ("transferor") may elect to transfer its Part VI.1 tax liability to a related taxable Canadian corporation ("transferee"). The relationship must exist throughout the particular taxation year of the transferor, and throughout the last taxation year of the transferee ending at or before the end of that taxation year of the transferor. If these conditions are met, the two corporations may file an agreement with the Minister, under which, the transferee would agree to pay all or a portion of the Part VI.1 tax of the transferor. When the agreement is filed, the amount of the transferor's Part VI.1 liability specified therein becomes the transferee's liability, and accordingly the transferor is relieved directly of such liability.

The filing requires the Minister, pursuant to subsection 191.3(3), to assess or reassess the transferor and the transferee for any relevant taxation year to give effect to the terms of the agreement. To that end, the amount of tax, interest, and penalties specified in the agreement will be included in the Part VI.1 tax payable by the transferee, and will be deducted from the amount of the Part VI.1 tax payable by the transferor. This would be the case even where the limitation period under subsection 152(4) or (5) might otherwise apply.

However, although no longer directly liable by virtue of the transfer, paragraph 191.3(1)(e) imposes a joint and several liability on the transferor for the transferee's Part VI.1 tax liability. In that regard, subsection 191.3(5) permits the Minister to assess the transferor at any time in respect of the amount, and provides that Division I of Part I applies in respect of the assessment as though it had been made under section 152.

Section 157 requires a corporation, other than a small Canadian-controlled private corporation, to pay its taxes estimated for a particular year by instalment amounts, which are due by the last day of each month in the year. Any balance of tax payable must be paid by the balance-due day for the year. The amount of the instalment is determined by reference to an instalment base, which is defined in section 5301(1) of the Income Tax Regulations (the "Regulations") to mean the aggregate of the tax payable under Parts I, I.3, VI, VI.1, and XIII.1 by the corporation for its taxation year preceding the particular taxation year.

Tax payable means the tax payable as fixed by assessment or reassessment, see subsection 248(2). It follows that the amount assessed is the instalment base referred to in subsection 5301(1) of the Regulations, and would include, in the instant case, the amount of the Part VI.1 tax assessed or reassessed under subsection 191.3(3) as tax payable against the transferee. The amount of that tax became part of the transferee's total tax payable for the preceding year, and accordingly will form part of the instalment base for the following year. In a similar vein, the transferor's tax payable will be assessed or reassessed, but to exclude Part VI.1 tax, with the result that its instalment base will not include the amount of the Part VI.1 tax that was transferred.

Should you have any questions or require additional information, please do not hesitate to contact Lindsay Frank at the number indicated above.

Terry Young, CA
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch