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:

(1) Where, and in what manner, does the legislation define the filing date for the first tax return of a newly incorporated corporation?

(2) When would a corporation be required to pay interest on installments of tax that it has failed to pay to the Receiver General?

Position:

(1) A corporation's "taxation year" is any fiscal period and the "fiscal period" of a corporation is the period for which the corporation's accounts in respect of the business are made up for purposes of assessment under the Act. No fiscal period of a corporation can end more than 53 weeks after it began.

(2) Question of fact.

Reasons:

(1) A corporation's "taxation year" is defined in paragraph 249(1)(a) of the Act and its "fiscal period" is defined in subsection 249.1(1) of the Act. Subsection 150(1) of the Act details when a corporation must file a tax return.

(2) Whether or not a corporation has to pay interest on installment payments that it failed to remit is determined by subsection 161(4.1) of the Act.

		May 18, 2001

	Wendy Baldwin	HEADQUARTERS
	Business Accounting Manager	A. Seidel, CMA
	Business Accounting Programs Division 	(613) 957-2058

	Attention: Sherry Dash
		2001-007963	

Fiscal Period of Corporation
T2 Standardized Accounting System

This is in reply to your facsimile dated April 11, 2001, in which you requested our views as to the fiscal period of a newly incorporated corporation for the purpose of determining whether the corporation is required to make installment payments pursuant to subsection 157(1) of the Income Tax Act (the "Act").

Background

1. A corporation is incorporated in Canada on March 5, 1999.

2. The corporation starts carrying on business in Canada on July 1, 1999.

3. The corporation files its first T2 tax return choosing a fiscal period that commenced on July 1, 1999 and ended on August 31, 2000.

Issues

Where, and in what manner, does the legislation define the filing date for the first tax return of a newly incorporated corporation?

When would a corporation be required to pay interest on installments of tax that it has failed to pay to the Receiver General?

Analysis

Fiscal period

A corporation's "taxation year" is a fiscal period pursuant to paragraph 249(1)(a) of the Act. Subsection 249.1(1) of the Act defines the "fiscal period" of a corporation to be the period for which the corporation's accounts in respect of the business are made up for purposes of assessment under the Act. However, pursuant to paragraph 249.1(1)(a) of the Act, no fiscal period of a corporation can end more than 53 weeks after it began. It is our view that a corporation's first fiscal period commences on the date of incorporation and must end no later than 53 weeks thereafter. Applying these provisions to your specific situation, the first taxation year of the new corporation would begin on March 5, 1999. The corporation can then choose a fiscal period that ends at any time up to 53 weeks after that date.

Where the corporation is inactive up to June 30, 1999, there is an argument that the corporation would start "the period for which the corporation's accounts in respect of the business will be made up for purposes of assessment under the Act" on July 1, 1999. The corporation would then decide on what date to end its first fiscal period. The corporation can choose any date that does not end more than 53 weeks after March 5, 1999. If the corporation were to choose June 30 as the date on which its fiscal period will end, the first fiscal period of the corporation would be from March 5, 1999 to June 30, 1999 and its second fiscal period would be from July 1, 1999 to June 30, 2000, since subsection 249.1(3) of the Act deems the subsequent fiscal period of the corporation to begin immediately after the previous fiscal period ends. Under no circumstance can the corporation choose to have a fiscal period that begins on July 1, 1999 and ends on August 31, 2000. This would be a fiscal period that has 61 weeks, thereby exceeding the 53-week limit in paragraph 249.1(1)(a) of the Act. Furthermore, once the corporation chooses June 30 as the end of its fiscal period, it cannot change the time when its fiscal period ends without the concurrence of the Minister by virtue of subsection 249.1(7) of the Act.

Pursuant to paragraph 150(1)(a) of the Act, a corporation is required to file a return of income, in prescribed form, within six months after the end of the taxation year, for each taxation year in which:

(a) the corporation is resident in Canada;

(b) the corporation carries on business in Canada;

(c) the corporation has a "taxable capital gain", as defined in section 38 of the Act;

(d) the corporation disposes of a "taxable Canadian property", within the meaning thereof in subsection 248(1) of the Act; or

(e) the corporation would be subject to tax under Part I of the Act but the income is exempt by virtue of a tax treaty.

Section 151 of the Act requires that the return be filed with an estimate of the tax payable for that taxation year. Payment of the remaining taxes owing must be made within the time frames outlined in paragraph 157(1)(b) of the Act. There is no exclusion to the filing requirement in subsection 150(1) of the Act for inactive corporations.

Installment Payments

Subject to the special rules in subsections 157(2), 157(2.1) and 157(3) of the Act, a corporation may also be required to make installment payments in respect of taxes owing for a taxation year pursuant to one of the three alternatives provided for under paragraph 157(1)(a) of the Act. Although the Act requires installment payments under either subparagraph 157(1)(a)(i), 157(1)(a)(ii) or 157(1)(a)(iii) of the Act, where applicable, paragraph 5 of Information Circular 81-11R3 ("IC 81-11R3") reflects the position of the Canada Customs and Revenue Agency that a corporation may base its installment payments for the current taxation year on the least amount determined under the three calculations in paragraph 157(1)(a) of the Act.

Subparagraph 157(1)(a)(i) of the Act, in general terms, is determined by reference to an estimate of taxes payable for the taxation year. Subparagraph 157(1)(a)(ii) of the Act makes reference to a corporation's "first installment base" and subparagraph 157(1)(a)(iii) of the Act makes reference to a corporation's "second installment base". These terms have, pursuant to subsection 157(4) of the Act, the meaning prescribed in section 5300 of the Income Tax Regulations (the "Regulations").

Subsection 5301(1) of the Regulations describes the first installment base of a corporation as being the aggregate of the tax payable under Part I of the Act for the taxation year preceding the particular year and the total of all taxes payable by the corporation under Parts I.3, VI and VI.1 of the Act for its taxation year preceding the particular year (subject to the adjustments required under subsection 5301(1) of the Regulations for short taxation years and under subsection 5301(3) of the Act, which applies if the preceding taxation year is less than 183 days). Where a corporation has been inactive for the taxation year(s) prior to the commencement of carrying on a business, and is not liable for any amount payable under the Act for the(se) year(s), the "first installment base" would be nil for the particular taxation year in which the corporation begins to carry on an active business. Accordingly, pursuant to our administrative position, no installment payments would be required for that taxation year since the "least net tax payable" under paragraph 157(1)(a) of the Act for the current taxation year would be the amount determined under 157(1)(a)(ii) of the Act, which is nil. If it was not for the administrative position, the requirements of paragraph 157(1)(a) of the Act would have required installment payments under subparagraph 157(1)(a)(i) of the Act as soon as the estimated taxes payable for the year exceeded $1,000 (subsection 157(2.1) of the Act).

Subsection 5301(2) of the Regulations provides that the second installment base of a corporation for a particular taxation year is equal to the amount of the first installment base of the corporation for the immediately preceding taxation year. An inactive corporation that begins to carry on a business in a particular year would have a "first installment base" of nil for the previous taxation year, which would result in the "second installment base" also being nil for the particular year in which the business was commenced. Since the first installment base of a corporation is nil in the year a corporation commences to carry on a business, the second installment base for the subsequent taxation year would also be nil and, according to our administrative position, no installment payments would be required for that taxation year since the "least net tax payable" under paragraph 157(1)(a) of the Act for the current taxation year would be nil under subparagraph 157(1)(a)(iii) of the Act. If it were not for the administrative position, the requirements of paragraph 157(1)(a) of the Act would have required installment payments under subparagraph 157(1)(a)(i) of the Act as soon as the estimated taxes payable for the year exceeded $1,000, or under subparagraph 157(1)(a)(ii) of the Act if the corporation had taxes payable in excess of $1,000 in the preceding taxation year.

Interest on Unpaid Installment Payments

Subsection 161(2) of the Act requires a taxpayer to pay interest on installment payments which the taxpayer has failed to make as required by subsection 157(1) of the Act. Pursuant to subsection 161(4.1) of the Act, where a corporation is required to pay an installment of tax for a taxation year, computed by reference to a method described in subsection 157(1) of the Act, the corporation is deemed "to have been liable to pay on or before each day referred to in subparagraph 157(1)(a)(i) to (iii) an ... installment computed by reference to" certain amounts. The amount subject to installment payments is determined by whichever of the following methods* gives rise to the least total amount of installments of tax for the year:

(a) the total of the taxes payable under Parts I, I.3, VI and VI.1 by the corporation for the year, determined before taking into consideration the "specified future tax consequences", within the meaning thereof in subsection 248(1) of the Act, for the year;

(b) the corporation's first installment base for the year; or

(c) the corporation's second installment base and its first installment base for the year.

*Each of the amounts determined for (a), (b) and (c) is reduced by the amount, if any, determined under any of paragraphs 157(3)(b) to (d) of the Act in respect of the corporation for the year.

Paragraph 15 of IC 81-11R3 states the following in respect of exemptions from installment payments and interest charges in respect of installment payments for new corporations:

"Since a new corporation has no preceding taxation year, it will not have an installment base for purposes of subparagraphs 157(1)(a)(ii) and (iii). The Department will not charge installment interest for the first year of operation."

This is consistent with subsection 161(4.1) of the Act since the amount determined under paragraph 161(4.1)(b) of the Act would be nil for all taxation years of a new corporation until the corporation commences to carry on a business.

New Standardized Accounting System

The new Standardized Accounting system compares the incorporation date with the fiscal period start date of the corporation's T2 return. If the first T2 return filed by a corporation indicates that the fiscal period being reported began 60 days or less after incorporation, the system considers this to be the first T2 tax return filed by the corporation. If the first T2 tax return filed by the corporation indicates that the fiscal period being reported on the T2 return began more than 60 days after incorporation, the system does not consider this to be the first T2 tax return filed by the corporation. You state that there is then a potential for an installment interest charge.

Firstly, we would point out that there is no provision in the Act to support the administrative position/computer program that would allow a corporation to commence its first fiscal period within 60 days of incorporation or inactivity. A corporation's first fiscal period commences on the day it is incorporated and its first fiscal period must end no later than 53 weeks after that date.

Secondly, the Standardized Accounting system appears not to have been programmed to recognize the amounts determined under subsection 161(4.1) of the Act. The amount determined under paragraph 161(4.1)(b) of the Act will be nil until, at the very least, a corporation is in its second year of carrying on a business. As long as the amount computed under paragraph 161(4.1)(b) of the Act is nil, this will be the method which gives rise to the least total amount of installments for the year such that no amount is assessable as interest on installment payments.

We hope our comments are of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department's mainframe computer. 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, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

John Oulton, CA
Section Manager
Business and Individual Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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