20 June 2006 External T.I. 2005-0165381E5 - calculation of variables in 127(10.2).

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: In the example below, are the variables in 127(10.2) calculated correctly?

Position: Yes.

Reasons: Plain reading of subsection 127(10.2).

							2005-016538
XXXXXXXXXX  					S. Lewis
(613) 941-7239
June 20, 2006

Dear XXXXXXXXXX:

Re: Calculation of the Variables in Subsection 127(10.2) of the Income Tax Act ("Act")

This is in response to your email of December 23, 2005, inquiring about the calculation of the variables in subsection 127(10.2) of the Act.

Hereinafter all statutory references are to the Act unless otherwise stated.

We understand the facts to be the following:

1. Xco, Yco and Zco are Canadian-controlled private corporations (CCPC's) and are related to each other;

2. Xco is associated with Zco;

3. Yco is associated with Zco;

4. Xco is only associated with Yco, by virtue of being associated with a third corporation, Zco, pursuant to subsection 256(2);

5. Xco, Yco and Zco are not associated with any other corporations;

6. Zco filed an election pursuant to subsection 256(2) for a particular taxation year not to be associated with Yco and Xco; as a result, Zco has a business limit of nil for the purpose of section 125; and

7. the taxable income (before specific future tax consequences) of the associated group (Xco, Yco, and Zco) for the previous taxation year was $300,000.

Based on the hypothetical scenario and on the assumption that any impact of the tax under Part I.3 of the Act and the rule relating to short taxation years on the calculation of the business limit (i.e., subsections 125(5) and 125(5.1)) is ignored, you have asked us to confirm the accuracy of your conclusions as set out below.

In determining the expenditure limit for the particular taxation year, it is your view that the variables in subsection 127(10.2) would be calculated in the following manner:

A - the taxable income of the associated group for the previous taxation year would include the taxable incomes of all three corporations and would be $300,000.

B - the total of the business limits under subsection 125 for the particular year would be $600,000 (i.e., $300,000 for Xco, $300,000 for Yco and $0 for Zco).

C - the total of the business limits of the members of the associated group for the particular taxation year would be $600,000.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

We agree with your conclusions regarding the parameters in subsection 127(10.2) as they would apply to the situation described above. In the case of associated corporations, parameter A in the formula in subsection 127(10.2) is the greater of $300,000 and the combined taxable income of the associated corporations for their previous taxation years. In the case of associated corporations, parameter B is the total of the business limits under section 125 of the associated corporations for the particular taxation year. In the case of associated corporations, parameter C is the total of the business limits of the associated corporations for the particular year if the Act were read without reference to subsections 125(5) and 125(5.1).

We trust that these comments will be 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