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:

Whether taxpayer's submission alters our view that interest arising on the refund of an "overpayment" under the Act would not constitute "adjusted business income" for purposes of determining the taxpayer's "manufacturing and processing profits deduction".

Position:

No.

Reasons:

Based upon a review of the relevant provisions of the Act and Regulations as well as related jurisprudence. See issue sheet to file #7-942949 for additional discussion.

March 21, 1996

Saint John, New Brunswick Resource Industries Section
Tax Services Office A. A. Cameron
Peter Mc Ginn (613) 957-8975
Large File Case Manager

Attention: Judie Yorke
960592

XXXXXXXXXX - Interest on Amounts Refunded

We are writing in reply to your memorandum of February 12, 1996, whereby a copy of a written submission from XXXXXXXXXX dated February 6, 1996, and concerning the above subject (the "Submission"), was forwarded for our consideration. In particular, you have asked whether the arguments advanced in the Submission would cause any of the opinions given in our memorandum to you of April 11, 1995, concerning this matter (the "Opinion") to be altered.

As discussed in more detail below, after having considered the arguments provided in the Submission, our conclusions remain as expressed in the Opinion.

Background

XXXXXXXXXX

Discussion

For purposes of section 125.1 of the Act, the phrase "Canadian manufacturing and processing profits" ("M & P Profits") is defined in subsection 125.1(3) thereof to mean "...such portion of the total of all amounts each of which is the income for the corporation for the year from an active business carried on in Canada as is determined under rules prescribed for that purpose by regulation...". Pursuant to section 5200 of the Income Tax Regulations (the "Regulations") and subject to section 5201 thereof, the M & P Profits of a corporation for a particular taxation year are prescribed to be a calculated proportion of its ADJUBI for that year. Under section 5202 of the Regulations, ADJUBI is defined, for the purposes of Part LII of the Regulations and subject to the provisions of sections 5203 and 5204 thereof, to mean, essentially, the excess of "the income of the corporation for the year from an active business carried on in Canada" over its losses from such "active business".

Therefore, as implied in the Opinion, in order for the Interest to be included in the M & P Profits of XXXXXXXXXX it would have to represent "income of the corporation for the year from an active business". Although this phrase is defined in subsection 125(7) of the Act, that definition is given in the context of section 125 thereof, such that, as noted in the Submission, this phrase is not expressly defined in the context of section 125.1 of the Act or section 5202 of the Regulations. In subsection 248(1) of the Act the term "active business" is defined for purposes of the Act, in part, as meaning "...any business carried on by a taxpayer other than a specified investment business or a personal services business" (to our knowledge neither of these two exclusions is relevant to the situation at hand).

In the decision of the Supreme Court of Canada in the Canadian Marconi Company case (86 DTC 6526 at page 6531) it is indicated, with reference to the computation of ADJUBI, that:

"Active business" is nowhere restricted to a manufacturing or processing business.

However, it is also acknowledged in that decision (at page 6529) that even where "...the presumption that income earned by a corporate taxpayer in the exercise of its duly authorized objects is income from a business..." is relevant, such presumption is "rebuttable" and that:

The question whether particular income is income from business or property remains a question of fact in every case.

In the decision of the Supreme Court of Canada in the Ensite Limited case (86 DTC 6521 at page 6525) it is indicated, in the context of a discussion of the "statutory framework" involving sections 125, 125.1 and 129 of the Act, that:

...s. 125.1 provides a deduction from tax payable in respect of a company's Canadian manufacturing and processing profits which are defined in s. 125.1(3) as including only active business income...

The Legislative scheme was thus to draw a distinction between active business income which would fall under ss.125 and 125.1 and other sources of income which would fall under s. 129.

In discussing the rationale for an amendment to the definition of "Canadian investment income" to exclude income from "a property used or held by the corporation in the year in the course of carrying on a business", it is indicated in the sentence immediately following the last sentence quoted above, that (emphasis added):

However, it was clearly arguable that income from property which was immersed in the trading activity of the corporation could qualify as active business income.

It is also indicated later on in the same page (page 6525) of the Court's decision in the Ensite Limited case that:

The rebuttable presumption that corporate income is income from a business...is of no application here as it would tend to collapse the distinction between active business income and other sources of income which Parliament intended to preserve in its amendment of s. 129(4) of the Act.

In our view, the above quotations from the two Supreme Court of Canada decisions cited support the view that the Courts recognize that: the determination of whether certain corporate income is income from property or income from business is a question of fact; the intent of Parliament reflected in the relevant legislation is that not all corporate income, only "active business income", will qualify for inclusion in M & P Profits; and that it is arguable that income from property "immersed in the trading activity" of a corporation may qualify as "active business income" (in the absence of an express exclusion to the contrary).

It is also our view that, while the jurisprudence referred to in the Opinion and discussed in more detail in the Submission provides insight into how the Courts may look at the determination of a corporation's "income...from an active business" for purposes of its ADJUBI calculation, the facts and circumstances relevant to the situation at hand can be differentiated from those present in that jurisprudence.

In the situation at hand, the Interest arose under subsection 164(3) of the Act due to a refund of an "overpayment", as defined in subsection 164(7) of the Act, resulting from a reassessment ordered by the Courts. In other words, the Interest arose from the operation of the provisions of the Act rather than from business activities of a taxpayer, e.g., it did not arise from "investment activity" of the type present in the Canadian Marconi Company case, or from property "immersed in the trading activity of the corporation" as discussed in the Ensite Limited case.

Since, as implied in the Opinion, income tax is levied after profits have been determined and does not represent a deductible expense incurred to earn those profits, in our view income tax paid would not constitute an amount invested in the course of carrying on a taxpayer's business. As such, it is also our view that the Interest did not represent income from "an investment made in order to fulfil a mandatory condition precedent to trade" within the discussion in the Ensite Limited case (at page 6525) and as suggested in the Submission.

We would note that draft amendments to the Regulations released by the Department of Finance on March 6, 1996, contain a proposal to amend the definition of ADJUBI, found in subsection 5203(1) thereof, relevant to corporations having "resource activities". This proposal would specifically exclude "refund interest" (which would encompass interest of the type comprising the Interest) received, or that becomes receivable after March 5, 1996, from that calculation of ADJUBI.

In the explanatory notes accompanying the above draft amendments, it is indicated by the Department of Finance that this amendment "merely confirm(s) the calculation of the manufacturing and processing tax credit for the mining and oil and gas sectors that are presently receiving large amounts of refund interest" and that "(t)hese amendments are not to be construed as implying that the receipt of refund interest previously had the result of increasing" the entitlement to that credit.

In our view, the above comments indicate these proposed amendments are being made for greater certainty with regard to the calculation of ADJUBI for corporations having "resource activities". As noted in the decision of the Tax Court of Canada in the Fording Coal Limited case (95 DTC 571 at page 582):

..there is no presumption that a legislative amendment changes the state of the law.

Later on that same page it was also indicated that:

As a policy decision, the introduction of the amendment striving for greater clarity by which future transactions would be governed, is undoubtedly a good one, but it does not have the effect of precluding the respondent from succeeding on the present appeal on the basis that the previous legislation automatically permitted the appellant to have done what is now expressly forbidden.

It should also be noted that these comments from the Court were given in the context of a situation where the "Technical Notes" issued by the Department of Finance had expressly acknowledged that the relevant provisions of the Act could be "circumvented" prior to the amendments in question to "correct this defect" being made.

Therefore, in our view, the fact that an express exclusion of "refund interest" has only been proposed for the calculation of ADJUBI in the context of corporations having "resource activities" does not imply that the Interest should be accepted as forming part of the ADJUBI of XXXXXXXXXX in the situation at hand.

Summary

As discussed above, it remains our opinion that the Interest would not constitute "income...from an active business" to XXXXXXXXXX for purposes of determining its ADJUBI. In addition, it remains our view that the Interest would not be included in the "gross revenue" required to be allocated pursuant to subsection 402(3) of the Regulations (since this conclusion is consistent with the view expressed in the Submission, although based upon somewhat different reasoning, no further comments would appear warranted with regard to this item).

If you have any further questions concerning this matter, 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