12 June 1990 Ministerial Letter 59678 F - Calculation of Tax on Large Corporations

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.

Dear Sir:

We are writing in response to your correspondence of February 19, 1990 regarding the calculation of the proposed Part I.3 Tax on Large Corporations as it applies to the hypothetical example provided in your letter.

The pertinent facts of your example are as follows:

(1)     Taxable capital - $55,000,000

(2)     Capital deduction - $10,000,000

(3)     1989 taxation year - Jan. 1/89 to Sept. 30/89 (9 months)

(4)     1990 taxation year - Oct. 1/89 to Sept. 30/90 (12 months)

(5)     The company is not a financial institution, an insurance company or an exempt corporation.

(6)     Part I.3 tax at 0.175% is applicable only to fiscal periods ending after June 30, 1989 and only for that portion of the fiscal period that is after June 30, 1989.

(7)     All of the company's capital is employed in Canada and all of  its income is earned in Canada.

(8)     The surtax otherwise payable by the corporation for the year ended Sept. 30/89 is $19,900.

All references to legislation in the following analysis are to the amendments to the Income Tax Act (the "Act") as proposed in Bill C-28 as passed by the House of Commons on December 20, 1989.

Pursuant to subsections 181.1(1) and (2) respectively, the Part I.3 tax otherwise payable is $78,000 and the tax payable for the 1989 fiscal period of 273 days is $58,340.  Paragraph 48(3)(a) of Bill C-28 is a transitional rule applicable to taxation years commencing before July 1989 which reduces the tax otherwise payable by an amount equal to the proportion of the taxation year occurring prior to that month.  In the case at hand, the Part I.3 tax payable is reduced by the amount of $38,680 representing the 181 days in the taxation year before July 1989 divided by the 273 days in the entire 1989 taxation year.  Accordingly, the Part I.3 tax payable for the 1989 taxation year is $19,660 ($58,340 less $38,680) which amount must be remitted by January 15, 1990 pursuant to paragraph 181.7(1)(a) as applicable to taxation years ending before July 1993.

Subsection 125.3(1) provides that the Part I tax of a corporation for a taxation year may be reduced by the amount of the Part I.3 tax payable for that year and certain other specified years to the extent of its Canadian surtax payable for the year. Subsection 29(2) of Bill C-28 deems the Canadian surtax payable, for the purposes of subsection 125.3(1) for taxation years commencing before July 1989, to be the proportion of the surtax otherwise payable that the portion of the taxation year after June 1989 is of the whole taxation year.  In this example, the Canadian surtax payable is deemed to be $6,706 which is the maximum amount of Part I.3 tax which may be applied to reduce the corporation's Part I tax payable for the year.

In summary, the Part I.3 tax payable for the 1989 taxation year is $19,660, the surtax payable is $13,194 ($19,900 less $6,706) and the unused Part I.3 tax credit of the corporation, pursuant to subsection 125.3(4), is $12,954 ($19,660 less $6,706).  We would note that, in the example provided by you, both the surtax and the Part I.3 tax payable were reduced by the amount of $6,706.  It should, however, be only the surtax payable which is reduced leaving the full amount of the Part I.3 tax or $19,660, payable by January 15, 1990.

In calculating the instalments of Part I.3 tax required for the 1990 taxation year, we would note that subsection 43(2) of Bill C-28 provides a transitional rule with respect to subsection 187.1(1) for taxation years ending before July 1993.

Pursuant to clause 187.1(1)(b)(i)(B), applicable to the corporation's 1990 taxation year, the Part I.3 tax instalments will each equal one-ninth of the corporation's first instalment base as calculated pursuant to paragraph 187.7(2)(a). 

Paragraph 187.1(1)(d), applicable to the corporation's 1990 taxation year, deems that, for the purposes of calculating the first instalment base in subsection (2), the Part I.3 tax payable for the 1989 taxation year is the product obtained when the tax payable for 1989 in the amount of $19,660 is multiplied by the number of days in the taxation year divided by the number of days in that year after June 1989.  This calculation results in an amount of $58,340 which is the deemed Part I.3 tax payable, but only for the purposes of subsection 181.7(2) regarding the determination of the corporation's instalment base.  Pursuant to paragraph 181.7(2)(a), the first instalment base of the corporation for the 1990 taxation year is the product obtained when the tax for 1989, or in this case the deemed tax, is multiplied by 365 and divided by the number of days in the 1989 taxation year.  This results in a first installment base for 1990 of $78,000.  As previously noted, each instalment base for 1990 will be one-ninth of this amount, or $8,667, for each month between January and September 1990 inclusive.

We would again advise that these calculations are based upon the aforementioned proposed amendments to the Income Tax Act and that, while we trust our comments are of assistance to you, they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of a particular situation.

Yours truly,

F. Lee Workman for DirectorFinancial Industries DivisionRulings Directorate