19 January 2011 External T.I. 2010-0390831E5 - Compute LRIP - corporation becomes non-CCPC

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: Whether a future income tax asset should be included in variable A of the formula in subsection 89(8). Whether a future income tax liability should be included in variable D of the formula in subsection 89(8).

Position: No to both questions.

Reasons: Wording of the Act.

XXXXXXXXXX
									2010-039083
									U. Chalupa

January 19, 2011

Dear XXXXXXXXXX :

Re: LRIP Addition - Ceasing to be CCPC - Subsection 89(8)

This is in reply to your email dated December 16, 2010 in which you requested our comments on the application of subsection 89(8) of the Income Tax Act (hereinafter the "Act") to a hypothetical situation.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

In your email, you briefly described the facts of a situation as follows:

• A taxable Canadian corporation (hereinafter "Corporation") that was a Canadian-controlled private corporation (hereinafter "CCPC") would be acquired by a public company (hereinafter "Pubco"). As a result, Corporation would cease to be a CCPC.
• For its first taxation year following its acquisition by Pubco, Corporation would have to compute its low rate income pool (hereinafter "LRIP") addition pursuant to subsection 89(8).
• At the end of its taxation year preceding its change in status from a CCPC to a non-CCPC, Corporation would have a future income tax asset as well as a future income tax liability on its balance sheet.

In the circumstances described above, you requested our comments on whether the future income tax asset should be included in variable A of the formula in subsection 89(8) and on whether the future income tax liability should be included in variable D of the formula in subsection 89(8).

Our comments:

Subsection 89(8) creates an addition to LRIP, as defined in subsection 89(1), for a corporation that loses its CCPC status. The formula provided in subsection 89(8) is based on a "tax-balance-sheet approach". This LRIP addition is intended to determine what the corporation's LRIP would have been had it not been a CCPC in the preceding taxation year.

Variable A and Future Income Tax Asset

Variable A in subsection 89(8), which is an amount to be added to the new non-CCPC's LRIP, reads as follows:

A is the total of all amounts each of which is the cost amount to the corporation of a property immediately before the end of its preceding taxation year.

Under CICA Handbook section 3465, a future income tax asset represents the amounts of income tax benefits arising in respect of: (i) deductible temporary differences; (ii) the carryforward of unused tax losses; and (iii) the carryforward of unused income tax reductions, except for investment tax credits. In other words, it is a deferred tax debit that represents estimated future income tax benefits and is recognized to the extent that, on the basis of available evidence, it is more likely than not that the amount will be realized.

The term "property" is defined in subsection 248(1) of the Act and reads as follows:

"property" means property of any kind whatever whether real or personal or corporeal or incorporeal and, without restricting the generality of the foregoing, includes

(a) a right of any kind whatever, a share or a chose in action,

(b) unless a contrary intention is evident, money,

(c) a timber resource property, and

(d) the work in progress of a business that is a profession.

The term "right" used in paragraph (a) of this definition is not defined in the Act but it is defined in the Black's Law Dictionary (7th ed., 1999) as "something that is due to a person by just claim, legal guarantee or moral principle", "a power, privilege, or immunity secured to a person by law". The term "right" is also defined in the Black's Law Dictionary, as "the interest, claim, or ownership that one has in tangible or intangible property".

In light of theses definitions, we are of the opinion that a future income tax asset, which is an accounting concept, should not be considered as property in the context of subsection 89(8).

As indicated above, a future income tax asset is an estimate of future income tax benefits. It represents income taxes paid by the corporation which will possibly (more likely than not) be recovered in the future by the corporation. Generally, the corporation would have no right to claim the amount of its future income tax asset immediately before the end of its taxation year preceding its change in status from CCPC to a non-CCPC. In our view, a future income tax asset should not constitute property described in variable A of subsection 89(8) until the corporation has a right to a refund of the taxes immediately before the end of the taxation year preceding the change in status from CCPC to non-CCPC.

Variable D and Future Income Tax Liability

Variable D in subsection 89(8), which is an amount that reduces the new non-CCPC's LRIP, reads as follows:

D is the total of all amounts each of which is the amount of any debt owing by the corporation, or of any other obligation of the corporation to pay any amount, that was outstanding immediately before the end of its preceding taxation year.

Under CICA Handbook section 3465, a future income tax liability is the amount of income taxes arising from taxable temporary differences. It is an accounting provision for deferred taxes.

In our view, a future income tax liability should not constitute a debt owing by the corporation, or any other obligation to pay an amount, that was outstanding immediately before the end of its taxation year preceding its change in status from a CCPC to a non-CCPC until it represents taxes payable by the corporation at that time. As indicated above, a future income tax liability is an accounting concept and is solely an estimate of a provision for deferred taxes. The corporation has no obligation to pay this amount before the end of its taxation year preceding its change in status from a CCPC to a non-CCPC.

Consequently, a future income tax liability should not constitute a debt or obligation described in variable D of the formula provided in subsection 89(8).

We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch