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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: general discussion of allocation of business limit among associated corporations with multiple year ends in same calendar year
Position: numerical hypothetical example given
Reasons: as per legislation
2001-010711
XXXXXXXXXX Lena Holloway, CA
(613) 957-2104
April 11, 2002
Dear XXXXXXXXXX:
Re: Small Business Deduction - Associated Corporations
This is in reply to your letter dated October 23, 2001, regarding the allocation of the small business deduction among associated corporations with multiple year-ends ending within one calendar year. Your letter requested a technical interpretation on the application of subsection 125(5) of the Income Tax Act (Canada) (the "Act") and outlined the following hypothetical scenario to illustrate your concerns. All section references hereunder are to the Act unless otherwise indicated.
Scenario
1. As at December 29, 2000, ABC Co. Ltd. ("ABC") was not associated with any other companies. ABC owned 50% of the shares of JKL Co Ltd. ("JKL"). The year end for ABC is April 30th and ABC carries on active business.
2. On December 31, 2000, ABC bought all of the issued shares of DEF Co Ltd. ("DEF"). This was an arm's length purchase resulting in a deemed year end for DEF on December 30, 2000 (pursuant to subsections 256(9) and 249(4)). The year end for DEF is August 31, 2001.
3. On January 3, 2001 ABC bought all of the issued shares of GHI Co. Ltd. ("GHI"). This was an arm's length purchase resulting in a deemed year end for GHI on January 2, 2001.
4. GHI owned 50% of the shares of JKL. The year end for JKL is April 30, 2001. JKL carries on active business. The purchase by ABC of GHI resulted in a deemed year end for JKL on January 2, 2001.
5. The business limit was allocated for April 30, 2001 amongst the associated corporations such that ABC received $80,000 and JKL received $120,000 (subject to proration under paragraph 125(5)(b), as JKL had a short taxation year).
6. ABC and GHI were amalgamated on September 1, 2001 resulting in a deemed year end for each of ABC and GHI on August 31, 2001 (as explained in paragraph 9 of IT-474R).
Summary
Company Date Of Association Year End at Issue
ABC with DEF - 31/12/2000 31/08/2001
original year end with GHI - 03/01/2001
April 30 with JKL - 03/01/2001
DEF with ABC - 31/12/2000 no issue as no active
original year end with GHI - 03/01/2001 business
August 31 with JKL - 03/01/2001
GHI with ABC - 03/01/2001 no issue as no active
original year end with DEF - 03/01/2001 business
August 31 with JKL - 03/01/2001
JKL with ABC - 03/01/2001 31/08/2001
original year end with DEF - 03/01/2001
April 30 with GHI - 03/01/2001
Based on the above hypothetical scenario you had asked whether ABC and JKL are entitled to additional small business deductions for the period May 1, 2001 to August 31, 2001, and if so how much? Under your interpretation of subsection 125(5), ABC would be entitled to the lesser of $80,000 and $100,000 (the $100,000 being otherwise allocated under subsection 125(3)) with such amount being pro-rated over the short year.
Written confirmation of the tax implications arising from 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 pursuant to Information Circular 70-6R4. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with some general comments, which may be of assistance.
We would also note that, while it is a question of fact as to whether control of a corporation has been acquired, for purposes of this reply we have assumed that the above transactions have resulted in acquisitions of control, as requested. We also assume that subsections 125(4), 125(5.1), 256(5.1) and 256(7) are not relevant in the above situation, although we have not been provided with sufficient information to make such a determination.
Paragraph 125(5)(a) applies where a Canadian-controlled private corporation (the "first corporation") has more than one taxation year ending in a calendar year and it is associated in two or more of those taxation years with another Canadian-controlled private corporation that also has a taxation year ending in that calendar year. In such cases, for each second or subsequent taxation year in which the first corporation is associated with the other corporation ending in that calendar year, the business limit for the first corporation is equal to the lesser of (i) the business limit allocated to it in its first such taxation year ending in the calendar year and (ii) the business limit allocated to it for the particular subsequent taxation year ending in the calendar year. This restricted business limit is also subject to the proration rule in paragraph 125(5)(b).
The example provided in your letter did not specify the earnings figure for either ABC or JKL for the period from May 1 to August 31, 2001, however we have assumed that the $100,000 amount was allocated to ABC to cover its earnings, as your incoming letter provided this amount as one of the "lesser of two" figures.
For the taxation year from May 1 to August 31, 2001 inclusive, ABC would be entitled to a business limit under paragraph 125(5)(a) equal to the lesser of:
(a) the amount allocated to the corporation under subsection 125(3) as its business limit for its first taxation year that ended in that calendar year (for the first taxation year ending in calendar 2001, April 30, 2001, this amount is $80,000); and
(b) the amount allocated to the corporation under subsection 125(3) for that particular taxation year ending in that calendar year (for the second taxation year ending in calendar 2001, August 31,2001, this amount is $100,000).
The lesser amount in this case would be $80,000. The business limit actually allowed must be proportionate to the number of days in the short taxation year (from May 1 to August 31) over 365 under paragraph 125(5)(b).
If JKL were allocated the other $100,000 for the short taxation year ended August 31, 2001, its business limit would be restricted to this lesser amount of $100,000 even though the amount allocated to it for the first taxation year in which it was associated to ABC, ended April 30, 2001, was $120,000. This amount would also have be reduced proportionately for the short taxation year under paragraph 125(5)(b).
We trust the above comments are of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
- 4 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content