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: The determination of the business limit and expenditure limit under amended subsections 125(2) and 127(10.2), for a CCPC with multiple taxation years.
Position: General comments and examples provided.
Reasons: Wording of the relevant provisions.
October 21, 2003
Al Slater HEADQUARTERS
Appeals Division Bob Naufal, CMA
Hamilton TSO (613) 957-2744
2003-003157
Business limit and expenditure limit
We are writing in response to your fax dated July 23, 2003 wherein you requested information with respect to the allocation of the business limit and expenditure limit between associated Canadian-controlled private corporations (CCPC's) with multiple taxation years ending in calendar year 2003, as a result of the changes announced in the February 18, 2003 Federal Budget. Please note that these changes have been enacted by virtue of s.79(1) of Bill C-28, which received royal assent on June 19, 2003.
Business Limit
The business limit is defined in subsection 125(2) of the Income Tax Act (the "Act") for purposes of computing the small business deduction for a CCPC. Subsection 125(2) as amended, provides that the business limit will increase to $300,000, phased in over a four-year period by increments of $25,000 each calendar year, starting in 2003. For taxation years that begin after 2005, the business limit is $300,000. For taxation years that begin prior to 2006, the business limit under subsection 125(2) will be the total of the following:
(i) that proportion of $200,000 that the number of days in the taxation year that fall before 2003 is of the number of days in the taxation year;
(ii) that proportion of $225,000 that the number of days in the taxation year that fall in 2003 is of the number of days in the taxation year;
(iii) that proportion of $250,000 that the number of days in the taxation year that fall in 2004 is of the number of days in the taxation year;
(iv) that proportion of $275,000 that the number of days in the taxation year that fall in 2005 is of the number of days in the taxation year; and
(v) that proportion of $300,000 that the number of days in the taxation year that fall after 2005 is of the number of days in the taxation year.
The business limit is subject to the adjustments discussed in the subheadings that follow.
Associated Corporations
All CCPC's that are associated with each other in a taxation year must allocate amongst themselves, the annual business limit amount, by filing an agreement in prescribed form, pursuant to subsection 125(3) of the Act. Under amended subsection 125(3), associated CCPC's will determine their business limits for a taxation year in a two-stage process. First, the associated corporations will assign to one or more members of the associated group a percentage such that the total of the percentages assigned does not exceed 100%. (If the total exceeds 100%, then the associated group has a business limit of nil.) Second, each associated corporation to which a percentage has been assigned will multiply that percentage by a dollar figure. That dollar figure will generally be the amount that would be the corporation's business limit for the taxation year if the corporation were not associated in the year with any other corporation.
Subsection 125(4) of the Act allows the Minister to allocate the business limit among a group of associated CCPC's, if the group fails to file an agreement allocating the business limit among its members within 30 days after the Minister requests such information.
In a situation where a CCPC (the "first corporation") has more than one taxation year ending in the same calendar year and is associated in two or more of those taxation years with another CCPC that also has a taxation year ending in that calendar year, paragraph 125(5)(a) applies such that, for each second and subsequent taxation year, in which the first corporation is associated with the other corporation and ending in the particular calendar year, the business limit for the first corporation will be 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.
Taxation Years Less Than 51 Weeks
Pursuant to paragraph 125(5)(b), the business limits as determined above for a CCPC with a taxation year of less than 51 weeks, will be prorated based on the ratio of the number days in the taxation year to 365.
Business Limit Reduction
In general terms, subsection 125(5.1) of the Act provides that the business limit of a CCPC, as determined above, will be reduced if tax under Part I.3 of the Act was payable by the corporation for its preceding taxation year. If the corporation is associated with one or more other corporations in the particular year, the provision takes into account the Part I.3 tax payable by it and those other corporations, in each case for their last taxation years that ended in the preceding calendar year. Technical amendments introduced on December 20, 2002, includes an amendment to subsection 125(5.1) to clarify the applicability of this subsection in situations where a corporation is associated with more, fewer or different corporations in a particular taxation year.
Application of the Business Limit Provisions
In computing the business limit, the relevant provisions of section 125 should be applied in the following order:
? subsections 125(2) to (4);
? subsection 125(5); and
? subsection 125(5.1).
Business Limit Examples
We have prepared the following examples, to illustrate the application of the amended business limit provisions.
Example 1
In this example, assume that Canco 1 and Canco 2 are associated CCPC's. Canco 1 has a taxation year ending October 31, 2003 and Canco 2 has a taxation year ending February 28, 2003. The corporations agree to allocate the business limit as 70% to Canco 1 and 30% to Canco 2.
The business limits for each of Canco 1 and Canco 2 for their respective taxation years ending in the calendar year 2003 would be computed as follows:
Step 1: Canco 1 and Canco 2 file an agreement in prescribed form allocating the business limit as 70% to Canco 1 and 30% to Canco 2.
Step 2: Each of Canco 1 and Canco 2 compute the maximum business limit for their respective taxation years:
Canco 1: ($200,000 x 61/365) + ($225,000 x 304/365) = $220,822
Canco 2: ($200,000 x 306/365) + ($225,000 x 59/365) = $204,041
Step 3: Each of Canco 1 and Canco 2 allocate the business limits for their respective taxation years in accordance with the agreement filed in prescribed form:
Canco 1 for taxation year ending October 31, 2003: $220,822 x 70% = $154,575
Canco 2 for taxation year ending February 28, 2003: $204,041 x 30% = $ 61,212
Example 2
This example illustrates the application of the amended business limit provisions in a situation that includes multiple taxation year-ends and associated corporations. In this example, assume that Aco and Bco are associated CCPC's, each having a taxation year ending on June 30, 2003. On July 1, 2003, Cco, a CCPC, became associated with Aco and Bco. Cco has a taxation year ending September 30, 2003. Each of Aco and Bco obtain approval to change their taxation year to end on September 30, 2003. Aco and Bco agree to allocate the business limit as 80% to Aco and 20% to Bco for the taxation year ended June 30, 2003 and Aco, Bco and Cco agree to allocate the business limit as 60% to Aco and 20% to each of Bco and Cco for the year ended September 30, 2003.
For the taxation year ended June 30, 2003, the business limit for each of Aco and Bco would be computed as follows:
Step 1: Aco and Bco file an agreement in prescribed form allocating the business limit as 80% to Aco and 20% to Bco.
Step 2: Each of Aco and Bco compute the dollar figure on the basis they were not associated as follows:
($200,000 x 184/365) + ($225,000 x 181/365) = $212,397
Therefore, Aco's and Bco's business limit for the taxation year ended June 30, 2003 will be $169,918 ($212,397 x 80%) and $42,479 ($212,397 x 20%) respectively.
For the taxation year ended September 30, 2003, the business limit for each of Aco, Bco and Cco would be computed as follows:
Step 1: Aco, Bco and Cco file an agreement in prescribed form allocating the business limit as 60% to Aco and 20% to Bco and 20% to Cco.
Step 2: Each of Aco, Bco and Cco compute the dollar figure on the basis they were not associated. For each of Aco and Bco, the dollar figure would be $225,000 ($225,000 x 92/92). The dollar figure for Cco would be computed as follows:
($200,000 x 92/365) + ($225,000 x 273/365) = $218,699
Step 3: Compute the maximum business limit for the taxation year ending September 30, 2003, for each of Aco, Bco and Cco:
Aco: $225,000 x 60% = $135,000
Bco: $225,000 x 20% = $ 45,000
Cco: $218,699 x 20% = $ 43,740
Total $223,740
Step 4: Apply subsection 125(5): Because Aco's and Bco's taxation year ended September 30, 2003 was their second in which they were associated in the 2003 calendar year, paragraph 125(5)(a) of the Act applies to determine the business limit of each corporation to be the lesser of:
(i) the business limit determined for its first taxation year ending in 2003 (i.e. the amount determined for the taxation year ended June 30, 2003); and
(ii) its business limit determined for September 30, 2003.
Accordingly, Aco's business limit would be $135,000 and Bco's business limit would be $42,479 for the taxation year ended September 30, 2003. Moreover, pursuant to paragraph 125(5)(b) of the Act, the amounts would be prorated based on the ratio of the number of days in the taxation year to 365. Therefore, Aco's and Bco's business limit for September 30, 2003 would be $34,027 ($135,000 x 92/365) and $10,707 ($42,479 x 92/365) respectively.
Since Cco's September 30, 2003 taxation year was its only taxation year in 2003 and was not a short taxation year, subsection 125(5) of the Act would not apply to reduce Cco's business limit as computed above.
Reduction under subsection 125(5.1), if applicable
While not considered in examples 1 and 2, and subject to the enactment of the proposed amendment to subsection 125(5.1), please note that the business limits as otherwise computed in the examples, may be further reduced pursuant to the formula in subsection 125(5.1) of the Act if tax under Part I.3 was payable by any of the corporations for their last taxation year ending in the preceding calendar year.
Expenditure Limit
The expenditure limit is linked to the maximum business limit that is determined under section 125 of the Act. Accordingly, as a consequence of the amendments to the business limit under section 125 of the Act, the formula computing the expenditure limit in subsection 127(10.2) has been amended to reflect the increase in the business limit. In addition, the formula is also amended so that the expenditure limit continues to be reduced for CCPC's that have business limits less than the maximum otherwise determined in section 125 of the Act.
Subsection 127(10.2) of the Act, as amended, provides that for taxation years that end after 2002 the amended formula is
($5,000,000 - 10A) x B/C, where
? Element "A" represents the greater of $300,000 and the previous year's taxable income of the corporation or of such associated corporations;
? Element "B" represents the business limit of the corporation, or total business limits for the associated group, for the particular taxation year; and
? Element "C" represents the corporation's maximum business limit for the taxation year, calculated without applying subsection 125(5) (short taxation years) and (5.1) (reduction because of taxable capital in excess of $10 million), or the maximum business limit for a group of associated corporations for the particular taxation year.
In situations where a CCPC's taxation year is less than 51 weeks, paragraph 127(10.6)(c) provides that, in computing the expenditure limit under subsection 127(10.2), the CCPC's taxable income and business limit will be determined by multiplying those amounts by the ratio that 365 is to the number of days in the year.
Associated CCPC's
Under new subsection 127(10.21), the expenditure limit for a taxation year of a CCPC that is associated with one or more other CCPC's in the year is nil, unless otherwise provided. Subsection 127(10.3) of the Act allows a group of associated CCPCs to file an election with the Minister in which the group allocates the maximum expenditure limit for the group, as computed under subsection 127(10.2) of the Act. Under subsection 127(10.4) of the Act, if a group of associated CCPC's fails to file this election within 30 days after the Minister has requested this information, the Minister will allocate the expenditure limit.
In situations where a CCPC has more than one taxation year in the same calendar year and is associated with another CCPC in two or more of these taxation years, paragraph 127(10.6)(a) of the Act provides that the expenditure limit of the first CCPC for each taxation year in that calendar year in which it is associated with the other CCPC will be the amount that would have been the CCPC's share of the expenditure limit for the first such taxation year (had there been only one taxation year in that calendar year).
Taxation Years Less Than 51 Weeks
Pursuant to paragraph 127(10.6)(b), the expenditure limit as determined above for a CCPC with a taxation year of less than 51 weeks, will be prorated based on the ratio of the number days in the taxation year to 365.
Expenditure Limit Examples
To illustrate the application of the amended expenditure limit provisions, the following two examples are an extension of the business limit examples illustrated above. For purposes of these examples, assume that element A of the expenditure limit formula will be $300,000 for the taxation years illustrated in these examples. Moreover, assume that each corporation will file, for each taxation year, the agreement in prescribed form to allocate the maximum expenditure limit as computed under amended subsection 127(10.2) of the Act.
Example 1
To illustrate the application of the amended expenditure limit provisions, we are extending Example 1 of the business limit examples.
For Canco 1's taxation year ended October 31, 2003, the elements of the expenditure limit formula are as follows:
Element "A" - $300,000
Element "B" - $154,575 [the total of the business limits for October 31, 2003, as
determined above, for Canco 1 ($154,575) and Canco 2($0)]
Element "C" - $220,822 [the maximum business limit for Canco 1 for October 31, 2003 ].
The maximum expenditure limit for Canco 1 for the taxation year ended October 31, 2003 is $1,399,996 [($5,000,000 - 10($300,000)) x $154,575 / $220,822].
For Canco 2's taxation year ended February 28, 2003, the elements of the expenditure limit formula are as follows:
Element "A" - $300,000
Element "B" - $61,212 [the total of the business limits for February 28, 2003, as
determined above, for Canco 1 ($0) and Canco 2
($61,212)]
Element "C" - $204,041 [the maximum business limit for Canco 2 for October 31, 2003].
The maximum expenditure limit for Canco 2 for the taxation year ended February 28, 2003 is $599,997 [($5,000,000 - 10($300,000)) x $61,212 / $204,041].
Example 2
To illustrate the application of the amended expenditure limit provisions in a situation with multiple taxation years and associated CCPC's, we are extending Example 2 of the business limit examples.
For the taxation year ended June 30, 2003, the elements of the expenditure limit formula are as follows:
Element "A" - $300,000
Element "B" - $212,397 [the total of the business limits for the June 30, 2003, as
determined above, for Aco ($169,918) and Bco ($42,479)]
Element "C" - $212,397 [the maximum business limit for Aco and
Bco for June 30, 2003].The maximum expenditure limit that Aco and Bco would allocate between them for the year ended June 30, 2003 would be $2,000,000 [($5,000,000 - 10($300,000)) x $212,397/$212,397]. Assuming that Aco and Bco allocate the expenditure limit on the same basis as their business limits, Aco's allocated expenditure limit would be $1,600,000 [$2,000,000 x 80%] and Bco's allocated expenditure limit would be $400,000 [$2,000,000 x 20%].
For the taxation year ended September 30, 2003, the elements of the expenditure limit formula are as follows:
Element "A" - $300,000
Element "B" - $221,219 [the total of the business limits for September 30, 2003,
as determined above, for Aco ($135,000), Bco ($42,479)
and Cco ($43,740)]
Element "C" - $223,740 [the maximum business limit for Aco, Bco and
Cco for September 30, 2003].The maximum expenditure limit that would otherwise be allocated to the associated group of Aco, Bco and Cco for the taxation year ended September 30, 2003 would be $1,977,465 [($5,000,000 - 10($300,000)) x $221,219/$223,740].
However, because Aco's and Bco's taxation year ended September 30, 2003 was their second in the 2003 calendar year, paragraphs 127(10.6)(a) and (b) would apply to restrict their respective allocated expenditure limits to $403,288 [$1,600,000 x 92/365] and $100,822 [$400,000 x 92/365]. As a result, Cco's allocated expenditure limit would be $1,473,355 [$1,977,465 - ($403,288 + $100,822)].
Should you wish to discuss this matter further, do not hesitate to contact us.
Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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