2 May 1994 External T.I. 9408335 - INVESTMENT TAX CREDIT

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.

XXXXXXXXXX 5-940833

Attention: XXXXXXXXXX

May 2, 1994

Dear Sirs:

Re: Subsection 127(10.1) of the Income Tax Act (the "Act")

This is in reply to your letter dated March 24, 1994, wherein you requested our opinion concerning the interpretation that should be given to the above-mentioned subsection.

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release
dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed
transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance.

Unless as otherwise stated, all references to the Act are to the Income Tax Act, S.C. 1970-71-72, c. 63 as amended consolidated to June 10, 1993.

The expression "in the year" in the preamble of subsection 127(10.1) of the Act refers to the taxation year in which the expenditures were made by the Canadian controlled private corporation and should not be referred to as the "immediately preceding taxation year" as you seem to suggest in your letter. This will be even more evident under the amended wording of that subsection if the proposed amendments contained in Bill C-9 are adopted.

Thus, in the example given in your letter, Z Co. would not be allowed the benefit of subsection 127(10.1) of the Act for its 1993 taxation year because its taxable income ($0) for its 1992 taxation year together with the taxable income ($250,000) of X. Co. (which is associated with Z. Co. in its 1993 taxation year) for its 1992 taxation year exceeds the aggregate of the business limits (as determined under section 125 of the Act) of Z. Co. ($0) and X Co. ($200,000) for their 1992 taxation year.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch