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: Can a proprietorship have a short fiscal period in the calendar year of incorporation?
Position: Yes.
Reasons: Subsection 249.1(4) of the Act provides that a non-calendar fiscal period must be chosen in the first post-1994 fiscal period of the business. If no election is filed, paragraph 249.1(1)(b) of the Act applies and no fiscal period of the business can end after the end of the calendar year. Nevertheless, a proprietorship may request a change in its fiscal period under subsection 249.1(7) of the Act. Where the Minister concurs with the request for a change in the fiscal period, a proprietorship would have two fiscal periods in the same calendar year.
A. Seidel
XXXXXXXXXX (613) 957-2058
2002-017848
June 5, 2003
Dear XXXXXXXXXX:
Re: Fiscal Periods of a Proprietorship
We are writing in response to your letter dated December 11, 2002, wherein you requested our comments regarding the application of subsection 249.1(4) of the Income Tax Act (the "Act") to a proprietorship whose business is being incorporated.
You describe a situation in which a proprietorship with a December 31 fiscal period, as required by subsection 249.1(1) of the Act, wishes to incorporate during the current fiscal period. You query whether the proprietorship can request a change in its fiscal period, pursuant to subsection 249.1(4) or 249.1(7) of the Act, so that the proprietorship can claim capital cost allowance for the fiscal period that would end immediately before incorporation.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. To the extent that you require confirmation of the tax consequences of proposed transactions, you should be requesting an advance income tax ruling. However, we would point out that advance income tax rulings are not provided in respect of transactions that are substantially completed. The tax consequences of completed transactions can only be determined after a review of all of the relevant facts and documentation, which is the responsibility of the Verification and Enforcement Division of the local tax services office.
Although we cannot provide any specific comments with respect to the situation described in your letter, the following general comments may be of assistance.
Subject to certain exceptions, paragraph 249.1(1)(b) of the Act provides, among other things, that a fiscal period of a business of an individual cannot end after the end of the calendar year in which the fiscal period began. Subsection 249.1(3) of the Act provides that the subsequent fiscal period of a business is deemed to begin immediately after the time that a fiscal period ends. Therefore, for a proprietorship that has not filed the election described in subsection 249.1(4) of the Act, the fiscal period of the business will always be from January 1 to December 31 of any calendar year.
Subsection 249.1(4) of the Act allows, among other things, an individual to elect to have the fiscal period of a business end on a day other than December 31. However, the election must be filed in prescribed form "by the individual on or before the individual's filing-due date, and with the individual's return of income under Part I, for the taxation year that includes the first day of the first fiscal period of the business that begins after 1994". This means that for any business that was in existence on January 1, 1995, the election must have been filed with the individual's 1995 return of income under Part I of the Act. For any business commenced after 1994, the election would have to be filed with the first return of income under Part I of the Act of the individual that commenced the business. If the individual fails to file the election as required, the business will have a fiscal period that ends on December 31.
Notwithstanding subsections 249.1(1) and (4) of the Act, subsection 249.1(7) of the Act provides that "no change in the time when a fiscal period ends may be made for the purposes of this Act without the concurrence of the Minister". With the concurrence of the Minister, an individual could change the fiscal period of a business to end on a day other than the end of the calendar year. In those situations where the Minister concurs with the change in fiscal period, the business would have two fiscal periods in the same calendar year. The first fiscal period would end on the date specified in the request for the change in fiscal period and the second fiscal period would end on December 31 of the year in which the request for a change in fiscal period was granted. This is so because, notwithstanding subsection 249.1(7) of the Act, paragraph 249.1(1)(b) of the Act requires the business of an individual to have a fiscal period that ends at the end of the calendar year in which the fiscal period began.
Where an individual proposes to incorporate a proprietorship, the individual could request, pursuant to subsection 249.1(7) of the Act, a change in the fiscal period of the business. The individual would request that the last fiscal period of the proprietorship end immediately before the business of the proprietorship is incorporated. With the Minister's concurrence, the last fiscal period of the proprietorship would end immediately before the business is transferred to the corporation and the applicable provisions of subsection 249.1(1) of the Act would then apply to the corporation.
Where a taxation year of a proprietorship is less than 12 months, subject to the exceptions enumerated therein, subsection 1100(3) of the Income Tax Regulations (the "Regulations") provides that the amount that may be claimed as capital cost allowance for that short taxation year "shall not exceed that proportion of the maximum amount otherwise allowable that the number of days in the taxation year is of 365". Therefore, for any taxation year in which a proprietorship has a fiscal period of less than
12 months, subsection 1100(3) of the Regulations will apply to limit the amount of capital cost allowance that could be claimed in that fiscal period.
Yours truly,
John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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