29 May 2006 External T.I. 2005-0153771E5 - Venture Capital Corporation

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: Do provincial tax credits received by a taxpayer in respect of the acquisition of shares of a venture capital corporation reduce the adjusted cost base of the shares?

Position: No.

Reasons: Where government assistance is in respect of capital property other than depreciable property, paragraph 53(2)(k) of the Act generally provides for a reduction to the adjusted cost base of the property by the amount of the assistance received. However, clause 53(2)(k)(i)(C) of the Act provides an exception for "the amount of prescribed assistance that the taxpayer has received or is entitled to receive in respect of, or for the acquisition of, shares of a prescribed venture capital corporation..."

								2005-015377
XXXXXXXXXX 							Charles Rafuse
								613-957-8967
May 29, 2006

Dear XXXXXXXXXX:

Re: Venture Capital Corporation

This is in reply to your email dated October 6, 2005, concerning the treatment under the Income Tax Act (the "Act") of assistance received in respect of the acquisition of shares of a venture capital corporation.

Specifically, you have indicated that the company was formed in Saskatchewan in XXXXXXXXXX. All of the shares were issued for $XXXXXXXXXX and the related provincial tax credit in respect of the acquisition of the shares was claimed within three years of the company being formed. It is now planned to reduce the shareholders' investment by making a tax-free distribution and reducing the stated capital from $XXXXXXXXXX to $XXXXXXXXXX per share. Although your correspondence was not specific, we surmise from the statements made in your letter and we shall assume for the purpose of our reply, that the tax credits were received because the corporation was registered under the provisions of The Venture Capital Tax Credit Act, Statutes of Saskatchewan 1893-84, c. V-4.1, or under the provisions of The Labour-sponsored Venture Capital Corporations Act, Statutes of Saskatchewan 1986, c. L-0.2.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to offer the following general comments.

The tax treatment of assistance, which may be received in the form of a deduction from tax, in respect of the purchase of shares of prescribed venture capital corporations depends on whether the assistance is on income or capital account. Whether an amount is on account of income or capital is a determination of fact, which is resolved after a review of all the circumstances of the case. Where government assistance is in respect of a taxpayer's capital property other than depreciable property, paragraph 53(2)(k) of the Act provides for a reduction to the adjusted cost base ("ACB") of the property by the amount of the assistance which the taxpayer has received or is entitled to receive. There are exceptions to this general provision and, in this regard, clause 53(2)(k)(i)(C) of the Act provides an exception for the amount of "prescribed assistance" that the taxpayer has received or is entitled to receive in respect of, or for the acquisition of, shares of a "prescribed venture capital corporation" or a "prescribed labour-sponsored venture capital corporation".

For the purposes of clause 53(2)(k)(i)(C), section 6702 of the Income Tax Regulations (the "Regulations") stipulates that "prescribed assistance" includes the amount of any assistance received from a province in respect of the acquisition of a share of a venture capital corporation described in section 6700 of the Regulations and a tax credit in respect of the acquisition of a share of a prescribed labour-sponsored venture capital corporation described in section 6701 of the Regulations. In addition, for the purposes of clause 53(2)(k)(i)(C), paragraph 6700(a) of the Regulations provides that a "prescribed venture capital corporation" includes a corporation that is registered under the provisions of The Venture Capital Tax Credit Act, Statutes of Saskatchewan 1893-84, c. V-4.1 or under the provisions of The Labour-Sponsored Venture Capital Corporations Act, Statutes of Saskatchewan 1986, c. L-0.2. For the purposes of clause 53(2)(k)(i)(C), section 6701 of the Regulations indicates that a "prescribed labour-sponsored venture capital corporation" includes a corporation that is registered under the provisions of The Labour-Sponsored Venture Capital Corporations Act, Statutes of Saskatchewan 1986,

c. L-0.2. Accordingly, in our view, any assistance or a tax credit received from the Saskatchewan Government as described above falls within the exception provided for in clause 53(2)(k)(i)(C) of the Act such that the assistance or tax credit does not reduce the taxpayer's ACB of the acquired shares of a prescribed venture capital corporation or of a prescribed labour-sponsored venture capital corporation. However, the assistance or tax credit would reduce a capital loss otherwise determined, in accordance with the provisions of paragraph 40(2)(i) of the Act.

Where assistance, including assistance in the form of a deduction from tax, is on account of income, paragraph 12(1)(x) of the Act may apply. Paragraph 12(1)(x) generally provides that certain inducements, reimbursements, contributions, allowances and assistance received by a taxpayer in the course of earning income from a business or property will be included in income to the extent that they have not otherwise reduced the cost of a property or the amount of an outlay or expense. This paragraph further stipulates that an amount of assistance received by a taxpayer is not included in the taxpayer's income if it is a "prescribed amount". Paragraph 7300(b) of the Regulations defines "prescribed amount" for the purposes of paragraph 12(1)(x) to include "prescribed assistance" within the meaning assigned by section 6702 of the Regulations. In our view, based on the meaning of "prescribed assistance" in section 6702 of the Regulations as reflected in our explanation above, any assistance or tax credit provided by the Province of Saskatchewan as described above is not included in a taxpayer's income by virtue of paragraph 12(1)(x) since the assistance or tax credit would constitute a prescribed amount.

You also asked if there is any provision of the Act, other than paragraph 40(2)(i), that would affect venture capital corporations or labour-sponsored venture capital corporations in any special manner. There are several tax provisions whose application or non-application depends on, or is affected by, whether the corporation is a venture capital corporation or a labour-sponsored venture capital corporation such as the provisions in Parts IV, VI.1, X.3 and Part XII.5 of the Act.

We trust this information is helpful.

Yours truly,

S. Parnanzone
Manager
Business Incentives and Capital Transactions Section
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch