2 July 2008 Internal T.I. 2007-0262341I7 - Definition of CCPC under 125(7)

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) Where a corporation elects under subsection 89(11) to not be a CCPC what is the amount determined for paragraph 125.1(1)(a) for the purposes of the M&PP deduction? 2) Whether subsection 127(10.1) and 127(10.2) would be impacted by a subsection 89(11) to not be a CCPC

Position: 1) No amounts are calculated under paragraphs 125(1)(a) to (c) and the related amount used in the calculation under paragraph 125.1(1)(a) is nil. 2) A corporation can determine a business limit under subsection 125(2) even though a subsection 89(11) election has been filed.

Reasons: 1) Subsection 125(1) indicates that "There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the taxation year, a Canadian-controlled private corporation, an amount equal to the corporation's small business deduction rate for the taxation year multiplied by the least of ...". Where a corporation elects under subsection 89(11) to not be a CCPC this condition has not been met and no amounts are determined under paragraphs 125(1)(a) to (c). 2) A corporation's business limit is determined under subsection 125(2) while new paragraph (d) of the definition of a CCPC refers to "in applying subsection (1)" (i.e. subsection 125(1)). Accordingly, a corporation can determine a business limit under subsection 125(2) even though a subsection 89(11) election has been filed.

Pierre Proulx
Publications Directorate
6 - 750 Heron Road                              2007-026234
Ottawa ON  K1A 0L5                              Charles Rafuse
                                                613-247-9237
July 2, 2008

Dear Mr. Proulx:

Re: Definition of CCPC under 125(7)

This is in reply to your email of December 7, 2007, concerning the definition of "Canadian-controlled private corporation" (CCPC) in subsection 125(7) the Income Tax Act ("Act") and a corporation's election not to be a CCPC under subsection 89(11) of the Act.

Subsection 125(7) of the Act defines CCPC, among other terms. This definition applies not only to the small business deduction (SBD) under section 125 but also, through its incorporation by reference into subsection 248(1) of the Act, to the Act as a whole. The definition was amended in 2007 by adding a new paragraph (d) which permits a corporation that would otherwise be a CCPC and that has filed an election as required under subsection 89(11) (and not revoked under subsection 89(12)) to be treated for certain purposes as not being a CCPC, most notably for the purposes of the SBD in subsection 125(1) of the Act and most of the new rules concerning eligible dividends.

You have noted that when a corporation also claims a manufacturing and processing profits (M&PP) deduction under subsection 125.1(1) of the Act, paragraph (a) thereof refers to the amount that is the least of amounts determined under paragraphs 125(1)(a) to (c). You have asked, where a corporation elects under subsection 89(11) to not be a CCPC, what is the least of the amounts determined under paragraphs 125(1)(a) to (c) to be used in paragraph 125.1(1)(a) for the purposes of the M&PP deduction.

Subsection 125(1) states: "There may be deducted from the tax otherwise payable under this Part for a taxation year by a corporation that was, throughout the taxation year, a Canadian-controlled private corporation, an amount equal to the corporation's small business deduction rate for the taxation year multiplied by the least of ...".

If a corporation does not meet the condition of being a CCPC as indicated in the quoted wording, the corporation is not entitled to claim the SBD. Where a corporation elects under subsection 89(11) to not be a CCPC, this condition has not been met; accordingly, no amounts are calculated under paragraphs 125(1)(a) to (c). In view of this, the related amount used in the calculation under paragraph 125.1(1)(a) is nil. This interpretation is consistent with the intent and purpose of the SBD and M&PP deduction in that the M&PP deduction is to be reduced for the amount eligible for the SBD claim. In the situation where a corporations elects not to be a CCPC under subsection 89(11) and as a result is not eligible for a SDB deduction, it is logical that there should be no related reduction of the M&PP deduction under paragraph 125.1(1)(a).

You have also asked whether subsections 127(10.1) and 127(10.2) would be impacted by a subsection 89(11) election to not be a CCPC. Subsection 127(10.1) of the Act provides an additional investment tax credit (ITC) for certain CCPCs, calculated as 15% of the least of three amounts, one of which is the corporation's "expenditure limit" for the year. A CCPC's expenditure limit for a taxation year is calculated under subsection 127(10.2), and is generally $2 million (subject to a reduction of $10 for each dollar of taxable income over $400,000 in the preceding year) multiplied by a fraction. The numerator of the fraction is the business limit under section 125 of the corporation (and associated corporations) for the year and the denominator is the business limit of the corporation (and associated corporations) without the reductions that can result under subsections 125(5) and (5.1) of the Act. Your question concerns whether a corporation that elects not to be a CCPC under subsection 89(11) has a business limit for the purposes of the fraction in subsection 127(10.2).

A corporation's business limit is determined under subsection 125(2) while new paragraph (d) of the definition of CCPC in subsection 125(7) indicates that a corporation that makes an election under subsection 89(11) (not revoked under subsection 89(12)) is not a CCPC "in applying subsection (1)" (i.e., subsection 125(1)) and some other tax provisions that do not specifically include subsection 125(2). Accordingly, it is our opinion that a corporation can determine a business limit under subsection 125(2) even though a subsection 89(11) election has been filed and such business limit can be taken into account for purposes of the fraction in subsection 127(10.2). As you may be aware, the reference to business limit in subsection 127(10.2) has been replaced with a reference to taxable capital employed in Canada by Bill C-50, which received Royal Assent on June 18, 2008.

We would note that we informally discussed the issues above with officials in the Department of Finance and they are comfortable with our interpretations.

Yours sincerely,

S. Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch