3 April 2002 Internal T.I. 2002-0124737 - BC Flow Through Share Tax Credit

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: 1) At what time are the BC Flow Through Share Tax Credits deducted under item J in the definition of CCEE in 66.1(6).

2) Is ITC deducted from CCEE under item J or item L of the definition of CCEE.

Position: They are deducted when the taxpayer has received the credit or at the time the taxpayer becomes legally entitled to the tax credit.

Reasons: 1) The phrase 'received or entitled to receive' used in item J of the definition of CCEE imposes a more restrictive test than the phrase 'has received, is entitled to receive or may reasonably be expected to receive' which is used in paragraph 127(11.1)(c.2). In order for a taxpayer to be 'entitled to receive' an amount, the taxpayer must have a clear legal right to receive the amount, and all of the pre-conditions to a 'right to receive' the amount must have been satisfied. One of the conditions to be entitled to receive the BC Flow Through Share Tax Credit is that an application must be filed with the taxpayer's income tax return. It is our view that the BC MFTS tax credit should not be deducted under item J in calculating the taxpayer's CCEE at the end of a particular taxation year, prior to the approval of the taxpayer's application for the tax credit. In our view, until such time as the application is approved, the taxpayer only has a reasonable expectation that he will receive the tax credit.

2) For purposes of section 66, the definition of 'government assistance' in subsection 66(15) does not exclude ITC. Based on the rule of interpretation that where statutory provisions overlap, the specific overrides the general", the specific reference to subsection 127(5) in item L in the CCEE definition overrides the general reference to government assistance in item J. Therefore ITC would be deducted under item L in calculating the taxpayer's CCEE.

April 3, 2002

Audit Directorate HEADQUARTERS
Tax Avoidance and Special Audits Division Reorganizations and
Special Audit Section Resources Division
David Shugar
Attention: David Duff (613) 957-2134

2002-012473

British Columbia (BC) Flow Through Share Tax Credit

This is in reply to the correspondence of October 17, 2001 between David Duff, Peter Lee and Terry Miszaniec regarding the timing of the deduction of the BC Mining Flow Through Share (BC MFTS) tax credit in the calculation of a taxpayer's cumulative Canadian exploration expense(CCEE). All references are to the federal Income Tax Act (the "Act") unless otherwise indicated.

For the reasons that follow, it is our view that:

i) the BC MFTS tax credit reduces the amount of flow-through share mining expenditure eligible for an investment tax credit (ITC);

ii) taxpayers only deduct the BC MFTS tax credit from their CCEE at the time they are legally entitled to receive the amount, which would not be before the time they file their application for the credit with their tax return, and

iii) ITC claimed under subsection 127(5) would be deducted under item L in calculating the taxpayer's CCEE, in the year following the year in which the ITC was deducted.

Only individuals, other than trusts, may claim the BC MFTS tax credit. A taxpayer would claim the BC MFTS tax credit by calculating the tax credit on form T1231 "BC Mining Flow Through Share Tax Credit" and including it with their T1 return. The BC MFTS tax credit is 20% of BC flow-through mining expenditures renounced to an individual by a corporation under a flow-through share agreement entered into after July 30, 2001. The amount of the tax credit that can be deducted in a year is limited to the BC provincial tax otherwise payable. Unused tax credits can be carried back three years and forward ten years. The corporation must have incurred the expenditures in British Columbia after July 30, 2001 and before January 1, 2004. The term 'BC flow-through mining expenditure' is defined in subsection 4.721(1) of the BC Income Tax Act by reference to the definition of 'flow-through mining expenditure' in subsection 127(9) of the federal Income Tax Act.

Calculation of ITC

For purposes of the definition of ITC, paragraph 127(11.1)(c.2) of the Act states:

(c.2) the amount of a taxpayer's flow-through mining expenditure for a taxation year is deemed to be the amount of the taxpayer's flow-through mining expenditure for the year as otherwise determined less the amount of any government assistance or non-government assistance in respect of expenses included in determining the taxpayer's flow-through mining expenditure for the year that, at the time of the filing of the taxpayer's return of income for the year, the taxpayer has received, is entitled to receive or can reasonably be expected to receive;
[italics added]

The phrase 'has received, is entitled to receive, or can reasonably be expected to receive' is broad enough to include assistance that the taxpayer has a legal right to receive, as well as assistance to which the taxpayer, based on his own evaluation of the facts at the time he files his return, expects to have a legal right to receive once the necessary requirements are met. It is anticipated that the time period between the end of the taxation year and the actual filing of the tax return will enable taxpayers to accurately ascertain the assistance to which they will be entitled for the prior taxation year, based upon the completion of the documentation necessary to obtain the assistance. Therefore, for purposes of calculating the 15% ITC for a particular year, taxpayers are required to deduct the BC MFTS tax credit in respect of that year, even though the taxpayer may not be entitled to the credit until after the end of the taxation year.

Deduction of the BC MFTS tax credit from CCEE

Subsections 4.721(4) and (5) of the BC Income Tax Act state the following:

(4) An individual who wishes to claim a tax credit under this section for a taxation year must file, with the return of income filed by the individual under section 29 for the taxation year, an application for the tax credit in the form, and containing the information, required by the Commissioner of Income Tax.

(5) In computing a tax credit under this section, an individual is not entitled to include an amount in respect of a BC mining flow-through expenditure of the individual for a taxation year unless the individual files the form containing the information required by subsection (4) in respect of that amount on or before the day that is one year after the individual's filing due-date for the taxation year that includes the effective date of a renunciation made in accordance with section 66 (12.6) of the federal Act in respect of that expenditure.

The BC MFTS tax credit is deducted from CCEE under item J which reads:

J is the total amount of assistance that the taxpayer has received or is entitled to receive in respect of any Canadian exploration expense incurred after 1980 or that can reasonably be related to Canadian exploration activities after 1980, to the extent that the assistance has not reduced the taxpayer's Canadian exploration expense by virtue of paragraph (9)(g),

							[italics added]

In determining when an amount is required to be included in J, the phrase 'has received or is entitled to receive' imposes a more restrictive test than the phrase 'has received, is entitled to receive or may reasonably be expected to receive.' The latter phrase is broad enough to deduct assistance that the taxpayer is not yet entitled to receive, while the former phrase is limited to amounts the taxpayer is legally entitled to receive at a particular time, which with respect to J, is at the end of the taxation year.

Black's Law Dictionary, 7th. Edition, provides the following definitions for 'entitle' and 'entitlement':

Entitle: To grant a legal right to or qualify for.

Entitlement: An absolute right to a (usu. monetary) benefit, such as social security, granted immediately upon meeting a legal requirement.

The verb 'entitle', the present tense of 'entitled', is defined by The Concise Oxford Dictionary as: 'a rightful claim (to a thing, to do).'

For the BC MFTS tax credit to be included in J of the definition of CCEE prior to the receipt thereof by the taxpayer, the taxpayer must be 'entitled to receive' that assistance. Since the Act does not specify the point at which such entitlement arises, it must be determined based upon a review of the relevant facts of each particular situation, taking into consideration the ordinary meaning of the word 'entitled.' In order for a taxpayer to be 'entitled to receive' an amount, the taxpayer must have a clear legal right to receive the amount, and all of the pre-conditions to a 'right to receive' the amount must have been satisfied. Where there is no entitlement to receive the amount, the absence of the phrase ... or may reasonably be expected to receive' prevents the inclusion of the amount in J.

The difficulty in establishing the time when entitlement occurs was discussed in Central Supply Company, 95 DTC 434, with respect to the Petroleum Incentive Program (PIP) grant, which required a taxpayer to apply for the grant. The company argued that the statute governing the PIP grant required application, requisition, and in certain circumstances, approval of the Minister, and until those conditions were met, the company was not entitled to the PIP grant. One of the Department's arguments was that there was a statutory entitlement to the grant and the company was entitled to the grant when it made the application for the grant. The Department compared the filing of the application to the rendering of an account. Although the Department won its appeal because the Court concluded that the whole series of transactions was contrary to the object and spirit of the Act, it is interesting to note that the Department did not claim the taxpayer was entitled to the grant before the application for it was made.

In the case of the BC MFTS tax credit, one of the pre-conditions is that an application (form T1231) for the tax credit must be filed, and subsection 4.721(5) of the BC Income Tax Act states that a taxpayer is not entitled to the tax credit unless an application for the credit is filed with the taxpayer's tax return within the specified time period. The subsection does not state that the taxpayer becomes entitled to the tax credit on filing the application; it only describes one of the conditions that must be met before becoming entitled to the tax credit. It is reasonable to consider that the taxpayer would not be entitled to the credit until the CCRA, acting on behalf of the Province, reviews and approves the application. In addition, since the amount of tax credit a taxpayer can deduct is limited to the provincial tax otherwise payable, a taxpayer can be entitled to the 20% tax credit but not be able to deduct the full amount in a particular year.

Based on the restrictive meaning of the phrase 'has received or entitled to receive' used in item J of the definition of CCEE, when compared to the broad meaning of the phrase 'has received, is entitled to receive or can reasonably be expected to receive' used elsewhere in the Act, it is our view that the BC MFTS tax credit is not required to be deducted under item J in calculating the taxpayer's CCEE at the end of a particular taxation year, prior to the approval of the taxpayer's application for the tax credit. In our view, until such time as the application is approved, the taxpayer only has a reasonable expectation that he will receive the tax credit.

Deduction of ITC from CCEE

The definition of 'assistance' in subsection 66(15) includes deductions from tax, as confirmed in British Columbia Forest Products Limited, 85 DTC 5577, and Tioxide Canada Inc., 96 DTC 6296. Pursuant to subsection 66.1(6.1), this definition applies to section 66.1. Therefore, based on the rule of interpretation confirmed in the decision of the Federal Court - Trial Division in The Queen v. George R. Albino, 94 DTC 6071, where Rothstein, J.A. stated "Where statutory provisions overlap, the specific overrides the general...", the specific reference to subsection 127(5) in item L in the CCEE definition overrides the general reference to assistance in item J. To disregard that interpretation would make item L meaningless. Under item L the ITC would be deducted in calculating the taxpayer's CCEE, in the year following the year in which the ITC was deducted in computing taxes payable.

For Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch