14 July 2004 Internal T.I. 2004-0072241I7 - Provincial ITC & 12(1)(x)

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: 1.application date of tax credit; 2.whether section 9 vs. 12(1)(x) applies

Position: 1. see ITTN 29; 2.in this case section 12(1)(x) is applicable

Reasons: 1. policy carefully formulated in ITTN 29; 2. in keeping with policy in IT273R2- paragraph 17

		July 14, 2004

	SR&ED Directorate	HEADQUARTERS
	Mel Machado	L.Holloway CA
	Financial Legislative Directorate	(613) 957-2104
	50 O'Connor Street, 7th Floor

	Attention:  Kevin Gibson
		2004-007224

Income Inclusion of British Columbia Investment Tax Credit on the Prescribed Proxy Amount ("BC ITC")

We are writing in response to your memorandum dated April 19, 2004 requesting our views on the timing of income recognition in respect of provincial government assistance. Your enquiry concerns the policy stated in Income Tax Technical News # 29 ("ITTN 29") and in particular, its application to the BC ITC.

Your memorandum described an actual case in which the claimant's representative argued that the BC ITC must be included in income under paragraph 12(1)(x) when received and therefore should not be included until it is applied against taxes payable. Under the provincial statute, the BC ITC is deemed to be paid on the "balance due day" as defined in the Act. In this particular case the claimant contends that "the BC ITC for the year ended December 31, 2002 would be reported under 12(1)(x) in the December 31, 2004 taxation year because it is deemed to been received on March 31, 2004." In this respect we will assume that the reference to 2004 in the previous statement should actually have been to 2003. The TSO has also concluded that the amount should be included in income under paragraph 12(1)(x) in the year in which the amount is applied against taxes payable.

As noted in your correspondence, ITTN 29 provides guidelines for determining when a tax credit or reduction in tax is considered to be received, and therefore included in income under paragraph 12(1)(x) of the Act. According to ITTN 29, a tax credit or a reduction in the tax calculation is considered to be received at the earliest of:

1. when the amount is applied as a reduction of instalment payments to be paid by the taxpayer, if it is credited to his instalment account by the fiscal authorities; or

2. when all the conditions for its receipt are met, at the earliest of:

a) when it reduces the tax payable for a taxation year, or
b) when it is paid, if it allows for or increases a tax refund."

While acknowledging that you do not believe the first date mentioned in ITTN 29 is applicable in this case because the amount is not being applied as a reduction of instalment payments to be paid by the taxpayer, it is your view that where an amount is being applied against instalments of a particular year, it should be included in income of that year and not on the date the amount is actually applied. In your view, the second date mentioned in ITTN 29 is more relevant in this case given that all conditions for receipt have been met at the time the return is filed. Therefore, in your opinion, the BC ITC would be included in income for the taxation year ended

December 31, 2002 notwithstanding that the amount is deemed to be applied in a subsequent year.

In summary, you require clarification on the following three questions:

1. With respect to the first criteria, you would like us to confirm when an amount would be considered to be applied as a reduction of instalment payments. Is it the date that the tax return for the particular year is filed, or the date the amount is deemed by the legislation to be applied against the instalment payments?

2. With respect to the second criteria, you have asked when an amount is considered to reduce the tax payable for a taxation year. Is it the date that the tax return is filed, or the date the amount is deemed by the legislation to reduce the tax payable for the particular year? Also you have asked, when an amount is considered to be paid, if it allows for an increase in a tax refund.

3. Lastly, you have asked for our comments as to whether the BC ITC should be included in income under subsection 12(1)(x) or under subsection 9(1) of the Act.

Our Comments

Question 1

According to our policy stated in ITTN 29, the relevant date is not necessarily the date deemed by legislation but rather it is the date the amount is applied as a reduction of instalment payments to be paid by the taxpayer, if it is credited to his instalment account by the fiscal authorities. Therefore if the return is filed and assessed earlier than the date deemed by legislation the amount would be considered applied on the assessment date as all the conditions for receipt will have been met on that date. Where however the return is filed on the due date, the date deemed by legislation becomes the relevant date because this is the date that the conditions for receipt have been met and the date that the amount will be applied by the fiscal authorities.

Question 2

The response to this question is identical to the previous response. If the return is filed and assessed earlier than the date that the amount is deemed by the provincial legislation to be paid, the amount would nevertheless be considered to be received when it is applied as a reduction of tax, or included in a refund, on the assessment date since all the conditions for receipt will have been met on that date.

On the other hand, where the return is filed on the due date, the "balance due day" becomes the relevant date as this is the date that, under provincial legislation, the amount is applied against tax payable. Therefore, the conditions for receipt have been met on this date. In either case, the amount would not be considered received in 2002. It would likely be considered received in the 2003 taxation year, and would therefore be reported in that year.

Question 3

The question of whether section 9 or a more specific section should apply in the case of income inclusions is a common one. For example, this issue is raised in SR & ED Application Policy paper 2000-03 dated October 31, 2000 entitled "Government Assistance Treatment of Provincial and Territorial R&D". This paper discusses "Assistance that relates to the PPA and the pool of deductible SR&ED Expenditures" and states the following:

"As the PPA is not an expenditure under paragraphs 37(1)(a) or subparagraph (b)(i), but is a notional amount which is used in lieu of the actual overhead expenditures in the calculation of the ITC, the PPA is not added to the SR&ED expenditure pool.

Consequently, the portion of the provincial or territorial tax credits which relates to the PPA should be included in income under section 9 or paragraph 12(1)(x) of the Act."

The application policy does not provide any guidance on how to determine whether subsection 9(1) or paragraph 12(1)(x) would apply to a particular amount.

However, this issue is discussed in IT-273R2. Paragraph 2 states:

"When assistance is received in the course of earning income from a business or property, the application of well-accepted business principles for the purpose of calculating profit or loss under section 9 commonly requires the cost of an asset or the amount of an expense to be reduced by any reimbursement or similar payment that relates to the acquisition of the asset or the expense incurred.... If the application of well-accepted business principles relating to the calculation of profit or loss for the purpose of section 9 does not require the government assistance to be included in income, or to reduce the cost or capital cost of a property or the amount deductible as an expense, a specific provision of the Income Tax Act, such as paragraph 12(1)(t), 12(1)(x), 12(1)(x.1) or 28(1)(d) (which refers to amounts deferred under section 80.3), or subparagraph 56(1)(a)(vi), may apply to require the amount to be included in income."

While this paragraph creates some doubt as to whether section 9 or section 12 should be used as the income inclusion section, paragraph 17 clarifies the issue with respect to tax credits, as follows:

"Federal and provincial tax credits and deductions from tax which are in the nature of inducements, or which are received as assistance for the cost of property or an expense, are included in income under paragraph 12(1)(x) in the year received unless one of the exceptions discussed in paragraph 8 applies. The federal small business deduction is an example of a deduction from tax that is neither an inducement nor assistance for the cost of a property or expense and thus, is not included in income under paragraph 12(1)(x)."

This clarifies that it is our policy to have subsection 12(1)(x) apply in circumstances of tax credits and deductions from tax. Please note that while ITTN 29 released July 14, 2003 amends paragraph 17 for purposes of determining when such assistance would be considered received, there is no change proposed to the discussion of the application of section 9 versus paragraph 12(1)(x).

In conclusion, while there may be some instances where the application of section 9 may be more appropriate, in the case outlined above paragraph 12(1)(x) should apply. This is in keeping with our published position in paragraph 17 of IT-273R2 with respect to tax credits.

We trust that the above comments will be helpful to you. Should you require any additional information, please do not hesitate to contact us.

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