5 November 2012 Internal T.I. 2011-0402381I7 - Transitional Tax Debit and Credit

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 the revised CCA and CEC deductions in years prior to 2009 are a "tainting transaction" where the CCA and CEC amounts are increased and a smaller non-capital loss is applied and the non-capital loss expires before 2009.

Position: Yes, but not one to which we would apply subsection 46(2) to shorten the amortization period.

Reasons: The reduced federal UCC and CEC pools reduce the transitional tax debit, however, it also leaves less CCA and CEC to be deducted in years after 2008. The reduced transitional debit is offset by higher Ontario income tax after 2008.

November 5, 2012

Hiten Gadhia Income Tax Rulings Directorate
Toronto West TSO Ontario Corporate Tax Division
Julie White
905 721 5202

2011-040238

Transitional Tax Debit/Credit

This is in reply to your email in which you requested that we consider whether the taxpayer's request to increase both the federal CCA and CEC deductions for each of the 2006 and 2007 taxation years, which in turn increases the amount of the non-capital loss expiring before 2009, is a "tainting transaction" for purposes of the Ontario transitional tax debit and credit.

Specifically, the taxpayer has requested additional federal CCA and CEC deductions be claimed in each of the 2006 and 2007 taxation years, in these years the taxpayer has non-capital losses expiring. As a result of the increased CCA and CEC deductions, the taxpayer uses less non-capital losses carried forward to reduce the net income and more non-capital losses expire. The corporation's taxable income does not change. Paragraph 9 of IC84-1 Revision of Capital Cost Allowance Claims and Other Permissive Deductions explains the policy for granting requests of this nature.

If the taxpayer's requested adjustments are granted, the transitional tax debit otherwise determined will be reduced, as the federal UCC and CEC pools will be reduced and the reduction is not offset by a higher non-capital loss pool as the non-capital loss value equivalent to the value of the additional CCA and CEC deductions claimed has expired. At issue is whether these adjustments would be considered a "tainting transaction".

The term "tainting transaction" refers to a transaction or event where it may reasonably be considered that one of the main purposes of the transaction or event was to reduce or avoid the inclusion of an amount to be added in the calculation of the transitional tax debit or increase the amount of the transitional tax credit. Where a corporation is a party to such an event or transaction subclause 46(2)(b)(iv) or (v) of the Taxation Act, 2007 (TA) will apply to end the amortization period early.

The amortization period is defined in subsection 46(2) of the TA and is generally the same as the corporation's reference period unless certain conditions are met.

Specifically, subclause 46(2)(b)(iv) applies to shorten the amortization period such that the corporation's amortization period starts at the beginning of the reference period and ends at the time immediately before the first time in the reference period when the corporation is a party to a tainting transaction. Subclause 46(2)(b)(v) applies to end the corporation's amortization period immediately after the beginning of the reference period if the corporation or another corporation that is a designated corporation was a party to a tainting transaction at any time before the beginning of the corporation's reference period.

Subsection 48(1) provides the formula that determines the amount of the transitional tax debit payable for a particular taxation year. Paragraph (a.1) of the variable "A" of the formula applies where the amortization period ends in the taxation year by reason of subclauses 46(2)(b)(iv) or (v) which causes the transitional tax debit to be accelerated and payable in the year the amortization period ends. In determining the amount of the transitional tax debit payable in a particular taxation year the formula uses the total federal balance and the total Ontario balance at the end of the taxation year, where the balance changes in the year the revised balance is used. Thus, if the amortization period ends early due to a tainting transaction, the accelerated transitional tax debit payable will be based on the revised total federal and total Ontario balances.

In the case at hand, the corporation filed its 2009 CCA and CEC schedules with the revised amounts, and the Schedule 506 reflected the lower CEC and UCC balances which were used to calculate the lower transitional debit amount. These actions could be considered an event for purposes of subclauses 46(2)(b)(iv) or (v). Based on the information provided to us, in our view it is likely that the reduction of the federal UCC and CEC deductions and the increase of the federal non-capital losses, which expire, appear to have been requested for no other reason than to reduce the transitional tax debit. Therefore, in our view, this is a "tainting transaction" as described in subclauses 46(2)(b)(iv) or (v).

However, in considering whether this event is a tainting transaction to which we would apply subsection 46(2) we need to consider the income tax effect for years after 2008 of the reduction of the UCC/CEC balances. The reduced federal UCC and CEC balances means that in years after 2008, there is less UCC/CEC to be amortized which in turn means the corporation will be paying tax on a larger taxable income. The losses can not be utilized to reduce that larger taxable income because they have expired. Although the transitional tax debits of the corporation will be reduced, they will be offset by increased Ontario corporate income tax after 2008 albeit at a lower corporate income tax rate than was in effect at the time the transitional tax debit balance was initially determined. As a result we would not consider this "event" to be a tainting transaction to which we would apply subsection 46(2) to end the corporation's amortization period at a time earlier than the end of the corporation's reference period.

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For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made to Ms. Bianca Orellana at (613) 957-0682. In such cases a copy will be sent to you for delivery to the taxpayer.

Steve Fron CA
Acting Manager
Trust Section II
Trust and Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch