7 May 2001 External T.I. 2000-0036535 - CDN-CONTROLLED PRIVATE CORP.

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether an election under subsection 256(2) of the Act allows an otherwise associated corporation to use the full $10 million capital deduction when calculating its LCT for purposes of the business limit reduction under subsection 125(5.1).

Position: No.

Reasons: Since an election filed under subsection 256(2) applies for purposes of section 125 only, it is our view that there is no basis for giving effect to an election under this provision when determining a corporation’s LCT under section 181.1.

XXXXXXXXXX 	J. Gibbons, CGA
		2000-003653
May 7, 2001

Dear XXXXXXXXXX:

We are replying to your letter dated July 4, 2000, concerning the interaction of subsections 125(5.1) and 256(2) of the Income Tax Act (the "Act"). In particular, you wish to know our views concerning the following hypothetical situation:

Facts

1. A, B and C are all Canadian-controlled private corporations.

2. A is associated with B.

3. C is associated with B.

4. A would not be associated with C except for the provisions of subsection 256(2).

5. A, B, or C is not associated with any other corporation.

6. B files an election pursuant to subsection 256(2) not to be associated with A or C.

7. A, B and C each have taxable capital employed in Canada in the preceding year for the purposes of subsection 181.1(1) of the Act of $7 million.

8. As A, B and C are associated for purposes of the large corporation tax (“LCT”) under Part I.3 of the Act, the $10 million capital deduction under section 181.5 of the Act is allocated equally resulting in LCT payable for each company in the preceding year of $8,250.

Your views

In your view, amount “B” in the formula in subsection 125(5.1) (“amount B”) is based on a notional calculation of LCT, and the actual LCT payable is irrelevant. Thus, in the situation described, since C is not associated with any other corporation for purposes of section 125 of the Act (as a result of the election under subsection 256(2)), amount “B” in the formula in subsection 125(5.1) should be calculated as zero since C’s taxable capital employed in Canada, i.e., $7 million, is less than the $10 million capital deduction available for stand-alone corporations.

Our views

While we agree that amount “B” in the formula in subsection 125(5.1) is based on a notional calculation, it is our view that amount “B” is the actual LCT before the proration for a short taxation year under subsection 181.1(2) and the deduction of surtax credits under subsection 181.1(4). Since an election filed under subsection 256(2) applies for purposes of section 125 only, it is our view that there is no basis for giving effect to an election under this provision when determining a corporation’s LCT under section 181.1. Thus, in the situation described, C would use $8,250 as its amount “B” in the formula for the business limit reduction under subsection 125(5.1) of the Act.

We noted your concern that an interpretation other than the one suggested by you would not give sense to the election under 256(2) of the Act in the circumstances described. We discussed your concerns with tax policy officials in the Department of Finance, who indicated that the above interpretation reflected the policy intention.

We trust that these comments will be of assistance.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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