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 principal-business corporation renounce $2,000,000 of specified CDE in a particular year which is made up of $1,000,000 of specified CDE incurred in that year and $1,000,000 of specified CDE incurred in the following year?
Position: Yes.
Reasons: Since the deeming provision in subsection 66(12.66) does not apply to paragraph 66(12.602)(c) of the Act, the amounts incurred in 2003 and carried back to 2002 will not affect the amount renounced in 2002.
January 9, 2004
Calgary Tax Services Office Income Tax Rulings Directorate
Industry Specialist Services Resources and Reorganizations
Peter Lee Luisa A. Majerus, C.A.
Resource Industry Specialist (613) 946-3558
2003-004427
Flow-through Share Rules Applicable to Specified Canadian Development Expenses
This is in reply to your email of October 17, 2003 wherein you requested our views on whether a principal-business corporation ("PBC") as defined in subsection 66(15) of the Income Tax Act can renounce, effective December 31 of a particular calendar year, more than $1,000,000 of Canadian Development Expenses ("CDE") pursuant to subsection 66(12.601).
You have asked us to consider the following hypothetical situation. A PBC issues flow-through shares in 2002 and incurs, in 2002, $1,000,000 of CDE described in subsection 66(12.601) (herein referred to as "specified CDE"). The PBC incurs an additional $1,000,000 of specified CDE in 2003 ("look-back CDE") and, pursuant to subsection 66(12.66) of the Act, renounces these expenditures effective December 31, 2002.
Subsection 66(12.602) limits the amount of specified CDE that may be renounced under subsection 66(12.601). More specifically, paragraph 66(12.602)(c) deems the corporation not to have renounced any amount under subsection 66(12.601) where the amount relates to CDE incurred by the corporation in a calendar year and the total amounts renounced under that subsection exceeds $1,000,000. The effect of this limitation is to restrict a corporation from renouncing more than $1,000,000 of specified CDE incurred in a particular calendar year.
Assuming that the renunciation of the look-back CDE in your example meets the requirements of subsection 66(12.66), that provision deems the expenses to have been incurred on the last day of the preceding year for the purposes of subsections 66(12.6), 66(12.601) and paragraph 66(12.602)(b). However, subsection 66(12.66) does not deem the expenses to be incurred on the last day of the preceding year for the purposes of paragraph 66(12.602)(c). Accordingly, subsection 66(12.66) does not deem the look-back CDE to be incurred in 2002 for the purpose of the $1,000,000 limit. Therefore, the PBC can renounce $1,000,000 of look-back CDE as well as $1,000,000 of specified CDE in 2002.
Although a PBC may renounce up to $2,000,000 of specified CDE to its flow-through shareholders at the end of a particular year in the manner set out above, only $1,000,000 of specified CDE may be generated in any calendar year. Therefore, a corporation's ability to renounce specified CDE incurred in the subsequent year will be limited to the extent that the corporation renounced some or all of the specified CDE under the look-back rules. Thus, in the hypothetical situation described above, the PBC would not have any specified CDE that it could renounce to its flow-through shareholders at the end of 2003.
Daryl Boychuk, LL.B
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
.../cont'd
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