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) Periods upon which ASPA is computed under paragraph (a) of the definition of ASPA. (2) Transitional reserve deduction under paragraph 34.2(11)(a) where a corporation has a change in fiscal periods.
Position: Comments provided for items "A", "C" and "D" in paragraph (a) of the definition of ASPA. (2) The transitional reserve is calculated based the defined specified percentage stipulated for the particular year in which the taxation year of the corporation ends.
Reasons: Definition of ASPA and specified percentage in subsection 34.2(1).
XXXXXXXXXX
2011-042541
R. Ferrari
February 8, 2012
Dear XXXXXXXXXX :
Re: Section 34.2 and Change in Fiscal Period of a Corporation
This is in reply to your email of October 25, 2011 and our telephone discussion of January 20, 2012, wherein you requested our views as to the application of new section 34.2 of the Income Tax Act (the "Act") in circumstances where a corporation has a change in its fiscal period.
In the hypothetical example submitted, the corporation has a taxation year end ("TYE") of June 30 and has a "significant interest", as defined in subsection 34.2(1), in a single-tier partnership that has a fiscal period end ("FPE") of December 31. The members of the partnership are not eligible to make an election under subsections 249.1(8) and 10 of the Act to change the fiscal period of the partnership. In order to simplify its accounting and tax reporting, the corporation wishes to change its fiscal period to align with the partnership's FPE on December 31, 2012. If the corporation obtains approval to change its FPE to December 31, 2012, you ask how this will effect the calculation of the transitional reserve for that taxation year and subsequent years. Your submission also indicates a request to confirm the periods upon which adjusted stub period accrual ("ASPA") income is calculated. For the purposes of the example, the following assumptions are made:
- The corporation is not a member in any other partnership.
- Unless otherwise indicated, the conditions stipulated for the calculation of ASPA as defined in subsection 34.2(1) have been met and will be calculated under paragraph (a) of that definition.
- The corporation does not have any losses which would give rise to an amount in item "B" and no designations will be made to which items "E" and "F" would apply in the ASPA calculation.
- Unless otherwise indicated, the conditions stipulated under subsection 34.2(2) for the inclusion of the ASPA amount in the corporation's income have been met.
- No other provision in section 34.2 of the Act, including inter alia, paragraphs 34.2(11)(b) and 34.2(11)(c), will have application to restrict or deny the full deduction to be claimed for the transitional reserve as calculated under paragraph 34.2(11)(a).
Our Comments
ASPA, as defined under paragraph (a) of the ASPA definition in subsection 34.2(1), is determined by the formula [(A - B) × C/D] - (E + F). Items A through F of that formula have the following meaning:
"A is the total of all amounts each of which is the corporation's share of an income or taxable capital gain of the partnership for a fiscal period of the partnership that ends in the year (other than any amount for which a deduction is available under section 112 or 113),
B is the total of all amounts each of which is the corporation's share of a loss or allowable capital loss - to the extent that the total of all allowable capital losses does not exceed the total of all taxable capital gains included in the description of A - of the partnership for a fiscal period of the partnership that ends in the year,
C is the number of days that are in both the year and the particular period,
D is the number of days in fiscal periods of the partnership that end in the year,
E is the amount of the qualified resource expense in respect of the particular period of the partnership that is designated by the corporation for the year under subsection (6) in its return of income for the year filed with the Minister on or before its filing-due date for the year, and
F is an amount designated by the corporation in its return of income for the year (other than an amount included in the description of E) and filed with the Minister on or before its filing-due date for the year;..."
TYE of June 30, 2011
For the corporation's TYE of June 30, 2011, item A of the ASPA formula would be computed with reference to a fiscal period of the partnership that ends in the year, which in the example submitted, would be the partnership's FPE of December 31, 2010. Item C in the formula is the number of days that are in both the "year" and the "particular period". In this example, the year is the corporation's taxation year from July 1, 2010 to June 30, 2011 and the particular period is the fiscal period of the partnership from January 1, 2011 to December 31, 2011. The number of days that fall within both the year and the particular period is 181 days. Item D in the formula is the number of days in fiscal periods of the partnership that end in the year, which is 365 days. The ASPA amount will be required to be included in the corporation's income by virtue of subsection 34.2(2).
The ASPA amount, which is the corporation's ASPA in respect of the partnership for its first TYE ending after March 22, 2011, is included in qualifying transitional income ("QTI") as defined in subsection 34.2(1). The calculation of the transitional reserve for QTI under paragraph 34.2(11)(a) is based on the specified percentage as defined in subsection 34.2(1). Where the first taxation year for which a corporation has QTI ends in 2011, as is the case in the example provided, the specified percentage is determined under paragraph (a) of the definition of specified percentage, which reads as follows:
"specified percentage", of a corporation for a particular taxation year in respect of a partnership, means
(a) if the first taxation year for which the corporation has qualifying transitional income ends in 2011 and the particular year ends in (i) 2011, 100%, (ii) 2012, 85%,(iii) 2013, 65%, (iv) 2014, 45%, (v) 2015, 25%, and
(vi) 2016, 0%..."
Accordingly, the corporation will compute its transitional reserve deduction under paragraph 34.2(11)(a) based on the specified percentage of 100% of the QTI for the TYE of June 30, 2011.
TYE June 30, 2012
For the corporation's TYE of June 30, 2012, paragraph 34.2(4) will allow the corporation a deduction for the amount that was included in computing its income in respect of a partnership for the immediately preceding taxation year (its TYE of June 30, 2011) pursuant to subsection 34.2(2). The corporation will be required to compute a new ASPA amount based on the partnership's FPE of December 31, 2011 under paragraph (a) of the ASPA definition, and to include that amount in its income for the TYE of June 30, 2012 pursuant to subsection 34.2(2).
Subsection 34.2(12) will also require that the corporation include in its income the amount of the transitional reserve that was deducted under subsection 34.2(11) for its TYE of June 30, 2011. The QTI amount will be required to be recalculated pursuant to subsection 34.2(16) and paragraph 34.2(17)(a). The QTI adjustment is a one-time adjustment and the adjusted QTI will be the corporation's QTI in respect of the partnership for that particular taxation year and each subsequent taxation year. The transitional reserve deduction calculated under paragraph 34.2(11)(a) for the TYE of June 30, 2012 will be based on the specified percentage of 85% of the adjusted QTI.
TYE of December 31, 2012
A change in the fiscal period of the corporation will require the concurrence of the Minister pursuant to subsection 249.1(7) of the Act. In order for the Minister to concur with such a change, the corporation must provide sound business reasons for changing the fiscal period, which includes ease of financial reporting. A written request to obtain approval of a change in fiscal period should be sent to the Director of the local district taxation office. The request should be accompanied by a written statement explaining the reasons for the change.
For the corporation's TYE of December 31, 2012, a deduction would be permitted under paragraph 34.2(4) for the ASPA amount that has been included in its income under subsection 34.2(2) in the immediately preceding TYE of June 30, 2012. A condition, inter alia, for ASPA to be calculated and included in income under subsection 34.2(2) requires that there is a fiscal period of the partnership that begins in the year and ends after the year. If the corporation is permitted a change in its FPE to December 31, 2012, an ASPA amount would not be computed or included in the income of the corporation under section 34.2 since the partnership's FPE will be aligned with the TYE of the corporation.
The transitional relief mechanisms under subsections 34.2(11) and 34.2(12) will continue to apply as provided for under the provisions. Subsection 34.2(12) will require the corporation to include in its income for the TYE December 31, 2012 the transitional reserve that was deducted by it under subsection 34.2(11) for its TYE June 30, 2012. The corporation would be permitted to deduct the reserve calculated under paragraph 34.2(11)(a) for the TYE of December 31, 2012. Since the corporation's TYE of December 31, 2012 ends in 2012, the calculation of the transitional reserve under paragraph 34.2(11)(a) would be based on the specified percentage of 85% of the adjusted QTI. In subsequent years, the specified percentage to be used in the computation of the transitional reserve under paragraph 34.2(11)(a) will be similarly determined based on the year in which the particular taxation year of the corporation ends for the years 2013 to 2016.
We trust our comments above are of assistance.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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