31 May 2007 External T.I. 2007-0223081E5 - Commercialization Investment Funds Program

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: What is the appropriate tax treatment of a grant received under the Ontario Commercialization Investment Funds Program in respect of an investment in an eligible business?

Position: In this case, the ACB of the shares or partnership interest, as the case may be, is reduced.

Reasons: Paragraph 53(2)(k) is applicable.

XXXXXXXXXX 2007-022308
P. Kohnen, CMA
May 31, 2007

Dear XXXXXXXXXX:

Re: Technical Interpretation - Commercialization Investment Funds Program

This is in response to your e-mail submissions of February 2nd, 5th, 8th and 14th, 2007, your facsimile submissions of May 15th and 17th, 2007 and telephone conversations (XXXXXXXXXX/Kohnen) and (XXXXXXXXXX/Albert) in which you requested our comments as to the appropriate tax treatment of grants received under the Ontario Commercialization Investment Funds Program by a registered corporation or partnership ("OCIF"), pursuant to Part III.2 of the Community Small Business Investments Funds Act, S.O 1992, c. 18 (the "CSBIFA").

Based on the content of your submissions, the relevant scenarios, as we understand them, are as follows:

1. A corporation is set up as an OCIF ("OCIF corporation") to invest in eligible opportunities (such as shares of a corporation or an interest in a partnership) that constitute an eligible business under the CSBIFA.

2. When the OCIF corporation makes certain eligible investments, as defined under the CSBIFA, it generally becomes entitled to a grant equal to 30% of the amount of such eligible investments, payable by the government of Ontario.

3. Alternately, rather than using a corporation as the structure within which the investment is made, a partnership is created ("OCIF partnership") which subsequently makes eligible investments that qualify for the OCIF grants.

Our comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5 entitled Advance Income Tax Rulings, dated May 17, 2002.

Where the particular transactions are completed, the enquiry should be addressed to the relevant tax service office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.

The determination of whether an eligible investment is held by an OCIF on income account or capital account is a question of fact, determined with reference to the course of conduct and the intention of a specific taxpayer. A general discussion on security transactions may be found in Interpretation Bulletin IT-479R, Transactions in Securities. For the purposes of the comments in this letter, it is assumed that the eligible investments are held by the OCIF on capital account. We have also assumed that a general partnership structure, rather than a limited partnership structure, is contemplated, such that the "at-risk rules" in subsection 96(2.1) to (2.7) of the Income Tax Act (the "Act") need not be considered.

Pursuant to paragraph 53(2)(k) of the Act, where property is acquired by a taxpayer after 1971, the amount of any government assistance which the taxpayer has, or is entitled to, receive, in respect of, or for the acquisition of, the property (other than certain excluded amounts described in clauses (A) through (D) therein) must be deducted when computing the adjusted cost base ("ACB") to the taxpayer of the property. In our view, the grant received by an OCIF in respect of its investment in an eligible investment pursuant to the CSBIFA would reduce the ACB of that eligible investment.

Paragraph 12(1)(x) of the Act generally requires the inclusion in the calculation of a taxpayer's income for the year of amounts received by the taxpayer in the year as assistance in respect of the cost of a property, unless an exception in subparagraph 12(1)(x)(v) to (viii) applies to the amount. The reduction to the ACB of an eligible investment pursuant to paragraph 53(2)(k), as described above, would, in our view, exclude the amount of assistance from the application of paragraph 12(1)(x) of the Act, by virtue of subparagraph (vi) therein.

The above reduction to the ACB of the property that constitutes the eligible investment by an OCIF corporation or OCIF partnership, pursuant to paragraph 53(2)(k) of the Act, is applicable to either a scenario in which an OCIF corporation or OCIF partnership invests in shares of a corporation or in an interest in a partnership that constitutes an eligible business under the CSBIFA.

We trust that the above comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch