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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Will 66(12.66) and 66(12.602) permit a corporation to renounce more than $2 million "specified CDE" incurred in a particular calendar year to a flow-through shareholder?
Position TAKEN:
The maximum "specified CDE" for any one calendar year is limited to $2 million by 66(12.602)
Reasons FOR POSITION TAKEN:
66(12.66) expressly states that for the purpose of 66(12.6) and 66(12.601) the corporation is deemed to have incurred expense on the effective date of the renunciation. 66(12.66) does not effect the date the expense was incurred for the purpose of 66(12.602).
XXXXXXXXXX 5-940647
Attention: XXXXXXXXXX
June 22, 1994
Dear Sirs:
Re: Specified Canadian Development Expense
This is in reply to your letter dated March 11, 1994 wherein you requested our interpretation of subsection 66(12.602) of the Income Tax Act concerning a hypothetical situation.
In this regard we provide you with the following general comments which may be of assistance to you. Our comments, however, should not be construed as confirming the income tax consequences for a particular transaction.
Hypothetical Situation
1.Company X incurred Canadian development expense ("CDE") of $2 million within 60 days after the end of the 1993 calendar year (the "Initial Expenses").
2.The Initial Expenses were renounced effective December 31, 1993 to flow-through shareholders in accordance with subsections 66(12.601), 66(12.602) and 66(12.66) of the Act.
3.Pursuant to subsection 66(12.61) of the Act, the Initial Expenses were deemed to be Canadian exploration expense ("CEE") incurred by the flow-through shareholders on the effective date of the renunciation, December 31, 1993.
4.Throughout the remainder of 1994, Company X incurred an additional $2 million CDE (the "Subsequent Expenses").
According to paragraph 66(12.602)(c) of the Act, the renouncing corporation (and corporations associated with it) cannot collectively renounce under subsection 66(12.601) more than $2 million of CDE incurred in a particular calendar year. In the hypothetical situation, if Company X renounced $2 million of the Initial Expenses it had incurred in 1994 effective December 31, 1993, subsection 66(12.602) of the Act will apply to any renunciation of Subsequent Expenses incurred during 1994. As a result, the Subsequent Expenses incurred in 1994 are deemed not to have been renounced under subsection 66(12.601) of the Act. Subsection 66(12.66) of the Act provides that only for the purposes of renunciations under subsections 66(12.6) and 66(12.601) of the Act and not for the purpose of subsection 66(12.602) of the Act, the amount renounced in respect of CEE or CDE respectively, incurred during the first 60 days of the calendar year is deemed to have been incurred by the corporation at the end of the preceeding calendar year. Accordingly, it is our view that subsection 66(12.66) of the Act does not affect the time the CDE is incurred for the purpose of paragraph 66(12.602)(c) of the Act.
Where Company X renounced $0.6 million of the Initial Expenses effective December 31, 1993 pursuant to subsections 66(12.601) and 66(12.66) of the Act, it might renounce up to an additional $1.4 million of Initial Expenses and/or Subsequent Expenses effective December 31, 1994 under subsection 66(12.601) of the Act without exceeding the $2 million limit for 1994 under paragraph 66(12.602)(c) of the Act.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 21 of Information Circular 70-6R2, the above comments do not constitute an advance income tax ruling and accordingly are not binding on the Department.
Yours truly,
for A/Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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