26 February 1990 Ruling 59181 F - Refundable Investment Tax Credit - Qualifying Corporation

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.

February 26, 1990

Dear Sirs:

Re:  Subsection 127.1(2) -- Qualifying Corporation

We are writing in reply to your letter of November 29, 1989 wherein you requested confirmation of your technical interpretation of the definition of a "qualifying corporation" pursuant to subsection 127.1(2) of the Income Tax Act (the "Act") in the following hypothetical situation:

1.     Corporation A is a Canadian-controlled private corporation ("CCPC") associated with other corporations having nil taxable income, therefore, Corporation A is allocated the full $200,000 small business limit.

2.     In 1988, Corporation A had taxable income of $500,000 which is well in excess of the $200,000 small business deduction limit.

3.     In 1989, Corporation A incurred tax losses in excess of $1,000,000.

4.     Corporation A incurs significant expenditures in 1988 and 1989 that qualify as scientific research and experimental development ("SR & ED") expenditures pursuant to subsection 37(1) of the Act.

You have noted that only "qualifying corporations" are eligible to claim 100% refundable investment tax credits on SR & ED expenditures.  A qualifying corporation is defined pursuant to subsection 127.1(2) of the Act as a CCPC whose taxable income, as well as taxable income of its associated corporations, in the preceding year does not exceed the business limit.  Pursuant to subsections 125(2) and 125(3) of the Act, a corporation's business limit is that portion of $200,000 that is designated in its tax return.  Paragraph 111(1)(a) of the Act permits a taxpayer to deduct non-capital losses when calculating taxable income.  You interpret this legislation as enabling Corporation A to carry-back a portion of the 1989 non-capital loss to reduce its 1988 taxable income to nil.  Consequently, Corporation A would be considered a qualifying corporation in 1989 as its taxable income and that of its associated companies in the preceding year did not exceed the business limit.

We confirm your interpretation of these provisions as they apply to this hypothetical situation.

We trust that these comments will be of assistance.

Yours truly,

for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch