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) Can related companies choose to allocate the $50 million capital tax deduction in the manner set out below? 2) In allocating the $10 million capital tax deduction for the purposes of subsection 125(5.1) does a subsection 256(2) election apply? 3) Is an agreement made pursuant to subsection 181.5(2) relevant for determining the $10 million capital deduction for the purposes of subsection 125(5.1)?
Position: 1) Yes. 2) No. 3) Yes.
Reasons: 1) Subsection 181.1(2) permits the allocation of the amount among related companies. 2) Subsection 256(2) provides that an agreement under that section applies for the purposes of section 125. 3)Plain reading of subsection 181.5(4.1).
XXXXXXXXXX 2005-015379
S. Lewis
May 9, 2006
Dear: XXXXXXXXXX:
Re: Election under Subsection 256(2) of the Income Tax Act ("Act")
We are writing in response to your letter dated October 6, 2005 regarding the allocation of the capital deduction under section 181.5 of the Act as amended.
Hereinafter all statutory references are references to the Act unless stated otherwise.
We understand the facts to be the following:
1. Aco, Bco and Cco are Canadian-controlled private corporations ("CCPCs") and are related to each other.
2. Aco is associated with Bco.
3. Cco is associated with Bco.
4. Aco is only associated with Cco pursuant to subsection 256(2).
5. Aco, Bco and Cco are not associated with any other corporations.
6. Bco files each year an election pursuant to subsection 256(2) not to be associated with Aco or Cco.
7. Each corporation has taxable capital employed in Canada in the preceding year (2004) for the purposes of subsection 181.1(1) as follows:
Aco: $1,000,000
Bco: $20,000,000
Cco: $1,000,000.
You indicated that your scenario above is similar to that described in our documents 2003-00501I7 and 2004-0036535, except for the fact that in your scenario the taxable capital employed in Canada is not allocated equally amongst the corporations, unlike the equal allocations made in the scenarios described in the aforementioned documents.
Based on the hypothetical scenario you have asked us to confirm the accuracy of your conclusions as set out in A) and B) below.
A) For the purposes of determining the large corporations' tax ("LCT") under section 181.1, in respect of which an actual liability arises under Part I.3 of the Act, which liability could be referred to as the "actual" LCT or Part I.3 tax, Aco, Bco and Cco must allocate amongst themselves, the capital deduction of $50 million under subsection 181.5(2). Accordingly, in your view, the companies could choose to allocate this deduction as follows:
Aco: $5,000,000
Bco: $40,000,000
Cco: $5,000,000.
B) For the purposes of computing what could be described as the "notional" Part I.3 tax in order to calculate the reduction of the business limit by applying subsection 125(5.1), subsection 181.5(4.1) requires that a $10 million capital deduction is allocated amongst CCPCs that are related and associated. Accordingly, in your view, the companies could choose to allocate this deduction as follows:
Aco - $1,000,000
Bco -$8,000,000
Cco - $1,000,000
In your view, Aco and Cco would not have any "notional" LCT liability and Bco would have a "notional" LCT liability of $27,000 (ie., ($20,000,000 - $8,000,000) x .225%) with the result that the variable "B" in the formula in subsection 125(5.1) for each company would be as follows:
Aco -NIL
Bco -$27,000
Cco- NIL
In your view, the result of this allocation will be that Aco and Cco are not subject to a reduction of their business limits under 125(5.1) and by virtue of the election under subsection 256(2) Bco's business limit will be nil.
In the situation where Aco is allocated 10% of the $50,000,000 capital deduction as in A) above, for the purpose of computing its "actual" Part I.3 tax, you have also asked us to confirm whether Aco is required to be allocated an equal percentage of the $10,000,000 capital deduction for the purposes of calculating its "notional" Part I.3 tax necessary for the application of subsection 125(5.1).
Our comments are of a general nature only since we cannot confirm the tax implications of particular transactions unless the transactions are proposed and are the subject of an advance tax ruling request submitted in the manner set out in Information Circular IC 70-6R5. Where particular transactions are completed, the inquiry should be address to the appropriate District Taxation Office. However, we are prepared to provide you with some general comments that may be of assistance.
We agree with your conclusions in A) above. Subsection 181.1(2) allows a corporation that is related to any other corporation to file and agreement on behalf of the related group of which the corporation is a member under which the $50,000,000 capital deduction is allocated among the members of the related group.
We agree with your conclusions in B) above. However, we would mention that one may not simply choose to allocate the $10,000,000 capital deduction in any manner but must follow the requirements of subsection 181.5(4.1).
In answer to you question, if Aco is allocated 10% of the $50,000,000 capital deduction pursuant to subsection 181.1(2), subsection 181.5(4.1) requires an equal percentage of 10% of the $10,000,000 capital deduction to be allocated for the purposes of calculating its notional Part I.3 tax necessary for the application of subsection 125(5.1). Specifically subsection 181.5(4.1) states:
(4.1) For the purposes of applying subsection 125(5.1), the definitions "unused surtax credit" in subsections 181.1(6) and 190.1(5), and subsection 225.1(8), subsections (2) to (4) are to be read as if the amount determined under subsection (2) or (3), as the case may be, in respect of the corporation for the taxation year were that proportion of $10 million that the amount otherwise determined in respect of the corporation for the taxation year under that subsection is of $50 million.
We trust these comments are of assistance.
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
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