5 September 2001 External T.I. 2001-0093115 - SMALL BUSINESS DEDUCTION

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:

Tax planning for associated corporation and small business deduction rules.

Position:

General comments provided.

Reasons:

Tax planning is outside the purview of opinions given by the Directorate.

XXXXXXXXXX 	2001-009311
		Randy Hewlett, B. Comm.
September 5, 2001

Dear XXXXXXXXXX:

Re: Small Business Deduction and Associated Corporations

We are writing in response to your letter dated July 17, 2001, wherein you requested our opinion on a tax planning issue involving the associated corporation and small business deduction provisions of the Income Tax Act (the Act). Your inquiry related to whether it would be more advantageous for three owners of a company to receive salary as employees or direct any income through three separate holding companies. You were concerned about reducing the overall tax paid, taking into account the personal tax rates if the income were received as employees or the corporate tax rates if the companies had to share the small business deduction because of the association rules.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R4, Advanced Income Tax Rulings, dated January 29, 2001. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments.

Whether two or more corporations are associated is a question of fact, to be determined using the rules in section 256 of the Act. In your case there is insufficient information to establish if the corporations are associated for income tax purposes. For more information on this topic we direct your attention to Interpretation Bulletin IT-64R4, Corporations: Association and Control.

The small business deduction provided for in section 125 of the Act allows for a corporate tax reduction in respect of income of a Canadian Controlled Private Corporation (CCPC) from an active business carried on by it in Canada. If two or more CCPCs are associated with one another in a taxation year, the small business deduction must be shared, by allocating the annual business limit of $200,000 amongst the corporations for the taxation year. Information on the small business deduction is contained in Interpretation Bulletin, IT-73R5 The Small Business Deduction.

In addition to the small business deduction, a CCPC may be entitled to a tax reduction under subsection 123.4(3) of the Act. The reduction, applicable for 2001 and subsequent taxation years, is available on taxable income from an active business between $200,000 and $300,000, and must be shared among members of an associated group of companies.

Unfortunately, we are unable to comment on your inquiry with respect to the most advantageous manner to structure the transactions to minimize the overall tax liability. This is a matter of tax planning upon which this Directorate does not provide guidance. In that regard, we suggest you seek professional tax advice.

The publications noted above may be found on our Internet website at www.ccra-adrc.gc.ca.

We trust our comments will be of assistance to you.

Yours truly,

Terry Young, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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