13 May 2004 Internal T.I. 2003-0047991I7 - Refundable ITC

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.

Principal Issues: Whether a corporation is a qualifying corporation where both its taxable income and business limit are nil for the preceding year.

Position: No.

Reasons: Business limit is eliminated because its taxable capital employed in Canada exceeds $15 million

		May 13, 2004

	SR&ED Directorate	HEADQUARTERS
	Financial Legislative Application Section	B.G. Dodd
		957-8954
	Attention:  Connie Ng
		2003-004799

Qualifying Corporation

We are writing in reply to your request of November 10, 2003 concerning the definition of "qualifying corporation" in subsection 127.1(2) of the Income Tax Act (the "Act").

You describe a situation in which a corporation is, throughout the 2002 taxation year, a "Canadian-controlled private corporation" within the meaning of subsection 248(1) of the Act ("CCPC"). In its immediately preceding taxation year, the corporation's taxable income was nil and its "business limit" (as defined in subsection 125(2) of the Act) was nil. The corporation's business limit was nil as a result of the application of subsection 125(5.1) of the Act because its taxable capital employed in Canada (as determined under Part I.3) was greater than $15 million. Your concern is whether the corporation is a "qualifying corporation" as defined in subsection 127.1(2) of the Act. This is relevant for the purpose of determining a corporation's entitlement to the "refundable investment tax credit" as defined in subsection 127.1(2) of the Act.

It is our understanding that the corporation in question is not associated with another corporation and accordingly, our discussion does not address the rules applicable for associated corporations. In addition, our discussion is based on the provisions of the Act applicable for the 2002 and preceding taxation years.

Comments

Pursuant to subsection 127.1(2) of the Act

""qualifying corporation" for a particular taxation year that ends in a calendar year means

(a) a corporation that is a Canadian-controlled private corporation throughout the particular year (other than a corporation associated with another corporation in the particular year) the taxable income of which for its immediately preceding taxation year (determined before taking into consideration the specified future tax consequences for that preceding year) does not exceed its business limit for that preceding year, or ..."

As you note, paragraph 87 of IT-151R5 states, in part

"... corporations (and associated corporations) whose taxable capital employed in Canada in the previous taxation year ... exceeds $15 million will not have a business limit (see paragraph 81) and, therefore, will not meet the conditions to be a qualifying corporation. Because they will also have an expenditure limit that is nil (see paragraph 81), they will be prevented from earning refundable ITCs."

In our view, the position reflected above in paragraph 87 of IT-151R5 would apply in the circumstances in question. Pursuant to subsection 125(2) of the Act, a corporation's business limit for the year is $200,000. However, the business limit is reduced, on a formula basis, pursuant to subsection 125(5.1) of the Act, based on the corporation's Part I.3 tax liability, if any. Effectively, the business limit is reduced for corporations having taxable capital employed in Canada, as determined under Part I.3 of the Act, of between $10 and $15 million, and completely eliminated for corporations having more than $15 million of taxable capital employed in Canada. Subsection 125(5.1) of the Act was enacted to reduce the access of large corporations to the small business deduction in subsection 125(1). It is our view, after discussing the issue with officials of the Department of Finance, that the use of the business limit, as reduced by subsection 125(5.1) of the Act, as a determining factor in the definition of "qualifying corporation", is intended to similarly reduce or eliminate access to the refundable investment tax credit available in the case of CCPC's which are subject to tax under Part I.3 where their taxable income does not exceed $200,000. Accordingly, it is our view that where the corporation's taxable capital employed in Canada is greater than $15 million, it's business limit is eliminated such that it will not be a qualifying corporation as defined in subsection 127.1(2) of the Act.

We note that this is also consistent with the use of the business limit as a factor in determining a corporation's "expenditure limit" as defined in subsection 127(10.2) of the Act, which is relevant for determining SR&ED expenditures eligible for the additional investment tax credit under subsection 127(10.1). The 1994 Technical Notes issued by the Department of Finance describing the then-proposed change to the expenditure limit include the following description.

"Subsection 127(10.2) is amended, effective for taxation years that begin after 1995, as a consequence of the changes to the small business deduction in section 125 of the Act. ... In other words, the CCPC's expenditure limit will be reduced in accordance with the reduction in the CCPC's business limit under section 125 of the Act. Consequently, where the CCPC's business limit is zero, the CCPC's expenditure limit is also zero."

We hope the foregoing will be of assistance.

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch

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