1 May 1996 External T.I. 9609115 - UNUSED PART I.3 CREDITS

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:

Carry back of Unused Part I.3 Credits flowed through from a subsidiary before on a pre-1992 winding-up to a tax year of the parent that ended prior to the winding-up.

Position:

Yes.

Reasons:

The wording of paragraph 87(2)(j.9) as modified for a wind-up situation by paragraph 88(1)(e.2) and subsection 125.3(1) as it applied for a taxation year ending prior to 1992.

			960911
XXXXXXXXXX							Michael Cooke

Attention: XXXXXXXXXX

May 1, 1996

Dear Sirs:

Re: Carry back of Pre-1992 Unused Part I.3 Tax Credits ("LCT credits") Following a Winding-Up

This is in reply to your letter of March 11, 1996, in which you requested our views on the income tax consequences where a corporation carries back its unused LCT credits pursuant to subsection 125.3(1) of the Income Tax Act (the Act). Specifically, you have asked whether a subsidiary's ("Subco") unused pre-1992 LCT credits can be used by its parent ("Parentco") to reduce Parentco's pre-1992 Part I surtax otherwise payable where the winding-up of Subco commenced prior to the commencement of either corporation's 1992 taxation year.

The situation described in your letter relates to an actual fact situation. Questions concerning the proper determination of the income tax consequences of completed transactions should be addressed to the relevant Tax Services Office. However, we understand that you have already corresponded with the Toronto TSO on this matter but they suggested that you contact us. Therefore, we will provide you with the following general comments which we caution may not be applicable to the circumstances of your particular situation.

Analysis

Subsection 125.3(1) of the Act, as it read for taxation years ending before 1992, allowed a corporation to deduct from its Part I tax otherwise payable for the year an amount equal to the lesser of:

(a)the total of its Part I.3 tax payable for that year plus such part of any LCT credits for the seven taxation years immediately preceding and three taxation years immediately following the year; and

(b)its Canadian surtax payable for the year.

On a winding-up of a 90% owned taxable Canadian corporation paragraph 88(1)(e.2) of the Act provides, in part, that paragraph 87(2)(j.9) of the Act will apply to the winding-up with certain modifications. Paragraph 87(2)(j.9) states (as modified for winding-ups) that, "for the purpose of determining the amount deductible by the parent for any taxation year under section 125.2 or 125.3, the parent shall be deemed to be the same corporation as, and a continuation of, each subsidiary". These two provisions are intended to allow Parentco to pick up Subco's unused LCT credits for the purpose of determining the amount deductible by Parentco under subsection 125.3(1) in a taxation year following the winding-up of Subco.

It is our view that Parentco would be allowed to carry back the unused pre-1992 LCT credits it received from Subco to a taxation year of Parentco which ended before the winding-up of Subco as long as the winding-up of Subco occurred before the end of the Parent's 1992 taxation year. If the winding-up occurred after the end of the Parent's 1991 taxation year, the current version of subsection 125.3(1) no longer allows a carry back of unused LCT credits.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 and are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch