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:
Does ADJUBI include interest on over paid federal income tax?
Position TAKEN:
Interest on over paid taxes is not income from active business.
Reasons FOR POSITION TAKEN:
Over paid income tax was not used and risked, nor did it contribute in any way to the active business.
April 11, 1995
Saint John, New Brunswick Resource Industries
Taxation Service Centre Section
Audit Division B. Rankin
(613) 957-8974
Attention: Barry Reid
7-942949
Interest Income - ADJUBI
We are writing in reply to your November 7, 1994 request for our opinion on whether interest on overpaid income tax is considered to be Adjusted Business Income ("ADJUBI") for the purpose of the Canadian Manufacturing and Processing Profits ("M & P Profits").
XXXXXXXXXX
M & P Profits is described in subsection 125.1(3) of the Income Tax Act (the "Act") as income from active business determined under rules prescribed by regulation. Regulation 5201 describes M & P Profits as the ADJUBI for the year. Regulation 5202 describes ADJUBI as the amount by which the corporation's incomes from active business exceed losses from active business. Accordingly, in order for interest income to qualify for the purposes of computing M & P Profits, it must be income from an active business.
In Ensite Limited v. Her Majesty the Queen, 86 DTC 6521, the Supreme Court of Canada considered that if the funds were risked and used in an active business and if the funds were withdrawn so that there was a destabilizing effect on the business operations, then the money was integral to the business and interest income related to the funds was income from an active business. Her Majesty the Queen v. Marsh & McLennan Ltd., 83 DTC 5180 (F.C.A.), Aqua-Gem Investments Ltd. v. Minister of National Revenue, 86 DTC 1392 (T.C.C.), Atlas Industries Ltd. v. Minister of National Revenue, 86 DTC 1756 (T.C.C.), and Irving Garber Sales Canada Ltd. v. Minister of National Revenue, 87 DTC 427 (T.C.C.) also support the conclusion that interest is active business income related to an active business if the funds are held as an integral part of the business.
In our view, overpaid tax is not an integral part of the business operations. While income tax that is payable on income from a business is related to that business, the requirement to pay tax arises as a result of the income and after the income has been earned. It can not be said that income tax contributes to earning the income. Accordingly, the overpaid tax was not integral to the business and the funds were not risked and used in the business operations. In addition, XXXXXXXXXX had paid the tax, thus the withdrawal of the funds did not have a destabilizing effect on the active business operations.
We also considered the 1990 Federal Court-Trial Division decision, MacMillan Bloedel Limited v. Her Majesty the Queen, 90 DTC 6219 (FC-TD) where interest on loans to employees, overdue accounts receivable, loans to customers and loans to subsidiaries was found to be income from a logging operation for the purpose of the logging tax credit under subsection 127(1) of the Act. By analogy, interest on overpaid income tax would not be income from an active business because the overpaid tax did not contribute to the business operations in any way since income tax is determined after the results of the business operations are known. In the case of XXXXXXXXXX overpaid income tax was not a factor that contributed toward the success of the business. We agree with your conclusion that the interest is not incidental or pertaining to XXXXXXXXXX active business and is not correctly included in ADJUBI.
In accordance with subsection 402(5) of the Income Tax Regulations (the "Regulations") interest on bonds, debentures or mortgages is not included in "gross revenue" for the purpose of subsection 402(3) of the Regulations. In 1975 Rulings expressed the opinion that subsection 402(5) of the Regulations would not apply to exclude interest on bonds and dividends on shares from gross revenue for the purpose of subsection 402(3) of the Regulations if the property is used in connection with the principal business of the company. It follows that the overpaid tax upon which the interest was paid was not used in connection with XXXXXXXXXX business and as a result the interest would be excluded from gross revenue by virtue of subsection 402(5) of the Regulations.
If you require additional information, please contact the writer.
A/Chief
Resource Industries Section
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 1995
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