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Principal Issues: 1. Whether the taxable income and the taxable capital employed in Canada of corporations for the taxation year that ended immediately before the taxation year in which they amalgamated can be taken into account under paragraphs 157(1.3)(b) and 157(1.4)(b) in determining whether the amalgamated entity qualifies as a small-CCPC for the particular taxation year? 2. Whether the taxable income and the taxable capital employed in Canada of a parent corporation and its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up can be taken into account under paragraphs 157(1.3)(b) and 157(1.4)(b) in determining whether the parent corporation qualifies as a small-CCPC for the particular taxation year? 3. Whether a carry back of a NCL to the preceding taxation year can be taken into account under paragraph 157(1.2)(a) in determining whether the corporation qualifies as a small-CCPC for the particular taxation year?
Position: 1. No. 2. Yes. The taxable income and the taxable capital employed in Canada of the parent corporation and its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up taxation must be taken into account pursuant to paragraphs 157(1.3)(b) and 157(1.4)(b). 3. Yes
Reasons: 1. The amalgamated entity is deemed to be a new corporation, and the predecessor corporations are deemed to have ceased to exist further to their amalgamation pursuant to paragraph 87(2)(a). 2. The parent corporation remained in existence after the wind-up. The parent corporation was associated with its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up. 3. Application of the Act.
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2011-042527
Nancy Turgeon, CGA
October 16, 2012
Dear Madam,
Subject: Application of subsection 157(1.2) of the Act
This is a follow-up to your email received at our offices last October 20 in which you asked us for our opinion on the application of subsection 157(1.2) in a particular situation.
You described a situation where a Canadian-controlled private corporation (CCPC), required to pay monthly instalments in respect of a particular taxation year, deducted in computing its taxable income by virtue of paragraph 111(1)(a) for the taxation year preceding the particular taxation year, a non-capital loss (NCL) incurred in a subsequent taxation year ( the "Carryback"). The Carryback effected a reduction in its taxable income for the taxation year that preceded the particular taxation year to less than $500,000, one of the conditions set out in subsection 157(1.2) for the payment of instalments on a quarterly basis. You wish to know if the Carryback will affect the frequency of instalment payments for the particular taxation year.
You also wish to know, for the purpose of establishing the frequency of the instalment payments for a particular corporation in situations of amalgamation, winding-up or transfers of property of a CCPC, whether it is necessary to adjust the taxable income or taxable capital, as the case may be, of the corporation resulting from the amalgamation, the parent corporation or the transferee corporation.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act") or the Regulation to the Income Tax Act (the "Regulations").
Our Comments
Corporations must pay, subject to subsections 157(1.1) and (1.5), instalment payments as established by virtue of subsection 157(1).
However, under subsection 157(1.1), a small CCPC ("SCCPC") may pay the Receiver General instalment payments quarterly rather than monthly. Subsection 157(1.2) sets out the conditions that must be met for a corporation to qualify as a SCCPC. In particular, that subsection requires that the taxable income of the corporation determined under subsection (1.3) for the taxation year, or for the preceding taxation year, does not exceed $500,000; that the taxable capital of the corporation determined under subsection (1.4) for the taxation year, or for the preceding taxation year, does not exceed $10 million; that the corporation deducted in computing its tax payable for the year or for the preceding taxation year an amount under section 125 of the Act; and that throughout the 12-month period preceding its last instalment payment, it has met all its deadlines as to its remittances, its payments and the filing of all its returns. Paragraphs 157(1.3)(b) and 157(1.4)(b) provide that where a corporation is associated with another corporation in the particular taxation year, the taxable income and taxable capital of the corporation for the purposes of subsection 157(1.2) will include the amounts in respect of the associated corporation.
Carryback
In determining the amounts to be paid by an SCCPC, 157(1.1)(a) refers to the first as well as the second instalment base. These terms are defined in subsection 157(4) of the Act and in subsections 5301(1) and (2) of the Regulations, it being understood inter alia that the instalment base of a corporation represents its tax payable under Part I of the Act for the previous taxation year. Subsection 5301(1) of the Regulations refers in turn to subsection 5301(10) which, in particular, establishes that tax payable under Part I by a corporation for a taxation year means the corporation’s tax payable for the year under that Part, determined before taking into consideration the “specified future tax consequences” for the year. The definition of that term in s. 248(1)(a) refers to s. 161(7)(a) and includes any amount deducted under section 111 in respect of a loss for a subsequent taxation year.
Consequently, the amount of instalment payments in respect of a particular taxation year for a corporation must remain based on the tax payable regardless of the amount of the “specified future tax consequences” that results from the Carryback of a NCL to the taxation year that preceded the particular taxation year. However, the frequency of instalment payments may be affected by a Carryback where it has the effect of reducing the taxable income of the previous taxation year for a corporation to an amount not exceeding $500,000 and all other conditions set out in subsection 157(1.1) are satisfied.
Amalgamation
In an amalgamation to which section 87 applies, subsection 87(2) provides, in particular, that the amalgamated entity shall be deemed to be a new corporation except in respect of the matters specifically listed therein. Paragraph 5301(4)(a) of the Regulations provides that for the purposes of section 157, the "first instalment base" of a new corporation that was formed as a result of an amalgamation for its first taxation year is calculated by taking into account the tax payable under Part I of the Act by the predecessor corporations for their last taxation year. In addition, a new corporation created as a result of an amalgamation can qualify as SCCPC if all the conditions set out in subsection 157(1.2) are satisfied. The taxable income and taxable capital employed in Canada of the predecessor corporations for the taxation year that ended immediately before the amalgamation shall not be taken into account for the purposes of paragraphs 157(1.3)(b) and 157(1.4)(b) to determine whether the new corporation qualifies as a SCCPC since that corporation is deemed to be a new corporation and the predecessor corporations are deemed to have ceased to exist.
That means that the amount of the instalments in the first year of taxation of a new corporation that has been created as a result of an amalgamation is calculated on the basis of the tax payable by the predecessor corporations for their last taxation yearn and the new corporation created as a result of the amalgamation may make its instalment payments on a quarterly rather than monthly basis for its first taxation year if all the conditions in subsection 157(1.2) of the Act are satisfied.
Winding -up
Where a subsidiary within the meaning of subsection 88(1) has been wound-up and all or substantially all of the property of the subsidiary has been distributed to its parent corporation, paragraph 5301(6)(a) of the Regulations provides that the "first instalment base" of the parent company for the taxation year in which the property of the subsidiary was distributed to it is calculated in particular by taking into account the "first instalment base" of the subsidiary. Furthermore, the taxable income and taxable capital employed in Canada of a subsidiary for the taxation year of its winding-up must be taken into consideration for the purposes of paragraphs 157(1.3)(b) and 157(1.4)(b) to determine whether the parent qualifies as a SCCPC since the parent and the subsidiary are associated in the course of the particular taxation year by virtue of paragraph 256(1)(a).
Transfer of property
Paragraph 5301(8)(a) of the Regulations provides for the calculation of the "first instalment base" of a transferee corporation where another corporation (the transferor) with which it was not dealing at arm’s length disposed of all or substantially all of its property to it and where section 85 applied to the disposition. Thus, the transferee corporation must consider the "first instalment base" of the transferor when calculating its "first instalment base" for its taxation year in which the disposition falls. However, the taxable income and taxable capital employed in Canada of the transferor for the taxation year in which the disposition falls will be taken into account for the purposes of paragraphs 157(1.3)(b) and 157(1.4)(b) to determine whether the corporation qualifies as a SCCPC for the taxation year in which the disposition occurs only if the corporation and the corporation are associated during that taxation year.
We hope that our comments will be of assistance.
Best regards,
Guy Goulet, CPA, CA, M.Fisc.
Manager
International Operations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch
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