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 subsection 181.1(7) of the Act would require XXXXXXXXXX to make an allocation of its "unused surtax credit" (as defined in subsection 181.1(6) of the Act) that relate to each separate business in order to restrict their deductibility where control has been acquired, and if so, how is the allocation of the unused surtax credit between the two separate businesses to be made.
Position:
No. However, such an allocation would be required if the proposed amendments to subsection 181.1(7) (effective for acquisitions of control after April 26, 1995) are passed into law.
Reasons:
Based on clear wording of the legislation such an allocation is not required.
July 15, 1996
Calgary TSO Headquarters
G. C. Hoard Michael Cooke
Assistant Director, VECR (613) 957-3498
Attention: Keith Kam
Business Audit
961760
Subsection 181.1(7) of the Income Tax Act (the Act) - Separate Businesses
This is in reply to your facsimile memorandums of May 14, 1996, and June 21, 1996, and our telephone discussions, wherein you requested our views on the proper application of subsection 181.1(7) of the Act where the shares of a corporation are acquired by another unrelated corporation which results in a change of control of the acquired corporation and a particular business operation of the acquired corporation is not continued after the acquisition.
The basic facts as we understand them are as follows:
XXXXXXXXXX
Based on our telephone discussion on June 20, 1996 (Cooke/Kam), it was your view and XXXXXXXXXX represented two separate and distinct businesses carried on by XXXXXXXXXX Accordingly, you have instructed us not to address this issue and we have complied with your instructions.
Your specific question relates to whether subsection 181.1(7) of the Act would require XXXXXXXXXX to make an allocation of its "unused surtax credit" (as defined in subsection 181.1(6) of the Act) that may relate to each separate business in order to restrict their deductibility where control has been acquired, and if so, how is the allocation of the unused surtax credit between the two separate businesses to be made.
Subsection 181.1(7) of the Act provides, inter alia, that "where at any time control of a corporation has been acquired...no amount in respect of its unused surtax credit for a taxation year ending before that time is deductible by the corporation for a taxation year ending after that time...except that
(a) where a business was carried on by the corporation in a taxation year ending before that time, its unused surtax credit for that year is deductible by the corporation for a particular taxation year ending after that time only if that business was carried on by the corporation for profit or with a reasonable expectation of profit throughout the particular year and only to the extent of that proportion of the corporation's tax payable under this Part for the particular year that
(i) the amount, if any, by which
(A) the total of its income from under Part I for the particular year from that business...
exceeds
(B) the total of all amounts each of which is an amount deducted under paragraph 111(1)(a) or (d) in computing its taxable income under Part I for the particular year...in respect of that business or the other business is of the greater of
(ii) the amount determined under subparagraph (i), and
(iii)the corporation's taxable income under Part I for the particular year;...".
The preamble to subsection 181.1(7) of the Act, being virtually identical to that of subsection 111(5) of the Act, sets out the general rule that no amount of unused surtax credit is deductible by the corporation after an acquisition of control. However, unlike paragraph 111(5)(a) of the Act, paragraph 181.1(7)(a) does not actually require an allocation of the amount of unused surtax credit that relates to each businesses carried on by the corporation before the acquisition of control.
In order for a corporation to be able to carry forward and deduct any amount of unused surtax credit that arose in a taxation year ending before an acquisition of control in a taxation year ending after that time (herein referred to as the "particular year") what paragraph 181.1(7)(a) does require is that a business must have been carried on by the corporation before the acquisition and that same business must be carried on throughout the particular year (for profit).
Assuming this criteria is met, paragraph 181.1(7)(a) then provides a formula that determines the amount of the corporation's Part I.3 tax liability for the particular year that can be offset by any unused surtax credit carried forward (subject to subsection 181.1(4) of the Act). This formula is simply stated as being the proportion of the income computed under Part I from the "continued business" and any "similar" business for the particular year (less non-capital losses claimed in that year which are related to those businesses) over greater of the taxable income of the corporation for the particular year, or the amount of Part I income determined above, times the corporation's total Part I.3 liability of the particular year.
We do note that the technical notes to subsection 181.1(7) and the changes announced in the April 26, 1995 technical amendments (now included in the June 20, 1996 Notice of Ways and Means Motion) appear to suggest that an allocation of unused surtax credit that relates to each businesses carried on by the corporation is required for acquisitions of control occurring before April 27, 1995. However, it is our view, based on the actual wording of the legislation that such an allocation is not supportable in law for acquisitions of control occurring before April 27, 1995. For acquisition of control occurring after April 27, 1995, the proposed amendment to subsection 181.1(7) of the Act, which changes the aforementioned formula, appears to correct this deficiency.
F. Lee Workman
Section Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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