29 July 2005 Internal T.I. 2005-0143681I7 - Carryback of ITC and Refundable ITCs

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 taxpayer could claim a refundable ITC in a year in which he has tax payable, and carry back a subsequent year's ITC to offset the tax payable, thereby increasing his refund for that year.

Position: Taxpayer cannot manipulate refundable ITC to claim more in ITCs than the maximum set out in subsection 127(5) of the Act.

Reasons: Subsection 127(5) sets out a formula for determining the maximum amount that can be claimed for ITC in the year. Subsection 127.1(3) deems an amount claimed as refundable ITC to have been deducted in the year under subsection 127(5). Therefore,the taxpayer cannot claim an ITC (including refundable ITC) in excess of the maximum allowed under subsection 127(5) of the Act.

                                          July 29, 2005

      HEADQUARTERS      HEADQUARTERS
      SR&ED Audit Directorate   Wayne Antle, CGA
      Mel Machado 957-2102
      Financial Legislative Application Section

      Attention:  Kevin Gibson
            2005-014368

Carry Back of Investment Tax Credit

This is further to your email on July 21, 2005 and our meeting on July 25, 2005 concerning claims for investment tax credit ("ITC") and refundable ITC in the following situation.

In year 1, a taxpayer has taxes otherwise payable of $25,000 and ITC of $100,000 with respect to qualified expenditures incurred in the year refundable at a 100% rate. In year 2, the taxpayer has no tax payable and a non-refundable ITC on qualified expenditures of $50,000. The taxpayer wants to claim the full refundable ITC of $100,000 in year 1 pursuant to subsection 127.1(1) of the Income Tax Act (the "Act"). Therefore, the taxpayer would be deemed to have paid $100,000 on account of tax payable on the balance due date for year 1, and would therefore receive a refund of $75,000. In year 2, the taxpayer wishes to carryback $25,000 of the $50,000 non-refundable ITC to year 1, and receive a $25,000 refund.

Our Comments

Subsection 127(5) of the Act calculates the maximum amount that a taxpayer may claim for ITC in a particular year. Ignoring minimum tax implications, subsection 127(5) determines the maximum ITC claim as the total of:

1) the taxpayer's investment tax credit at the end of the year in respect the taxpayer's SR&ED qualified expenditure pool at the end of the year or at the end of a preceding taxation year, and

2) the lesser of:

a) the taxpayer's investment tax credit at the end of the year in respect of the taxpayer's SR&ED qualified expenditure pool at the end of a subsequent taxation year to the extent that an investment tax credit was not deductible under this subsection for the subsequent year, and

b) the amount, if any, by which the taxpayer's tax otherwise payable under this Part for the year exceeds the amount, if any, determined under 1) above.

In Ainsworth Lumber Co. Ltd v. The Queen (2001 DTC 496), the Tax Court considered whether subsection 127(5) of the Act imposed an ordering provision on claims for ITC. The Court found that subsection 127(5) of the Act simply provides a formula for determining the amount of ITCs that may be deducted from tax otherwise payable for a taxation year, and includes neither a direction nor a prohibition respecting the order of ITC deductions. While the Court did not accept that subsection 127(5) imposed an order in which ITCs should be claimed, it did recognize that this provision set down a formula for determining the maximum ITC that could be claimed for a year.

In the above scenario, subsection 127(5) limits the ITC to the total of:

1) total ITCs for the current and preceding years, being $100,000

2) the lesser of:

a) subsequent year's ITC, being $50,000.

b) the amount by which taxes payable ($25,000) exceeds the amount determined in 1) ($100,000).

Therefore, the maximum ITC that can be claimed for year 1 is $100,000 pursuant to subsection 127(5) of the Act.

The taxpayer may claim $100,000 as refundable ITC pursuant to subsection 127.1(1) of the Act, without first claiming ITC under subsection 127(5) to reduce tax payable to nil. Subsection 127.1(3) of the Act would deem this amount to be ITC deducted for the year under subsection 127(5). Accordingly, no amount could be carried back from year 2 since the taxpayer would have already been deemed to have claimed $100,000 for ITC under subsection 127(5) of the Act.

We trust our comments will be of assistance.

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