20 April 1999 Internal T.I. 9907197 - INVESTMENT TAX CREDIT - CARRYOVER ON WIND-UP

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.

		April 20, 1999	

	Halifax Tax Services Office 	HEADQUARTERS
T. Harris
	Attention: Len Moore	(613) 957-2114
			7-990719

XXXXXXXXXX - Investment Tax Credit

This is in response to your facsimile of March 18, 1999 concerning the interpretation of paragraph 88(1)(e.3) of the Income Tax Act (the “Act”) with respect to certain investment tax credits (“ITC’s”) earned by XXXXXXXXXX in its taxation year ending XXXXXXXXXX.

Our understanding of the facts is as follows:

1. During its taxation year ended XXXXXXXXXX earned ITC’s totalling $XXXXXXXXXX.

2. On XXXXXXXXXX, control of XXXXXXXXXX was acquired. Pursuant to subsection 249(4) of the Act, XXXXXXXXXX fiscal year was deemed to have ended immediately before this change of control.

3. Subsequent to this change in control, XXXXXXXXXX adopted a fiscal period ending on XXXXXXXXXX of each year. Consequently, XXXXXXXXXX had fiscal years ending on XXXXXXXXXX through to XXXXXXXXXX.

4. On or about XXXXXXXXXX was wound up into its parent, XXXXXXXXXX under subsection 88(1) of the Act. Since XXXXXXXXXX was not dissolved at the time, this did not cause a taxation year end. You have advised us that XXXXXXXXXX was incorporated in XXXXXXXXXX and due to the amalgamation referred to in paragraph 5 below it had not established a fiscal year end.

5. On XXXXXXXXXX amalgamated with XXXXXXXXXX to form a company known as XXXXXXXXXX (“Amalco”).

6. In its taxation year ending XXXXXXXXXX claimed $XXXXXXXXXX of the ITC’s earned by XXXXXXXXXX in its XXXXXXXXXX taxation year. The balance of these ITC’s were claimed by Amalco in its taxation year ended XXXXXXXXXX.

You have requested our comments with respect to the proper interpretation of paragraph 88(1)(e.3) of the Act to the facts as presented above. In your opinion, the ITC should not be carried forward into the taxation year following the amalgamation since this represents the 11th fiscal period after the ITC’s were earned. However, you are not sure whether the ITC’s can be claimed by XXXXXXXXXX following the winding-up of XXXXXXXXXX . You have also noted that the taxpayer seems to be interpreting paragraph 88(1)(e.3) in a manner that following the wind-up, XXXXXXXXXX need not consider the two fiscal periods of XXXXXXXXXX which ended in XXXXXXXXXX.

Our Comments

With respect to the winding-up of a taxable Canadian corporation to which the provisions of subsection 88(1) of the Act apply, paragraph 88(1)(e.3) provides for a flow-through of the subsidiary’s unused investment tax credits to the parent. In this regard, subparagraph 88(1)(e.3)(i) deems a property acquired or expenditure made by the subsidiary to have been acquired or made by the parent in its taxation year in which the expenditure year of the subsidiary ended. Also, for the purposes, inter alia, of paragraph 88(1)(e.3), subsection 88(1.3) provides that where a parent corporation has been incorporated or otherwise formed after the end of a particular expenditure year of the subsidiary,

(a) the parent is deemed to have been in existence during the particular period beginning immediately before the end of the subsidiary’s first expenditure year and ending immediately after it was incorporated or otherwise formed;

(b) the parent is deemed to have had, throughout the particular period, fiscal periods ending on the day of the year on which its first fiscal period ended; and

(c) the parent is deemed to have been controlled, throughout the particular period, by the person or persons who controlled it immediately after it was incorporated or otherwise formed.

Based on our reading of these provisions, we believe that the parent corporation’s entitlement to carry forward ITC’s earned by the subsidiary is determined by the fiscal period of the parent in which the ITC was earned. The fact that the subsidiary may have had more than one fiscal period ending in a particular calendar year would not be relevant in determining the carry forward to the parent. While the provisions of paragraph 88(1)(e.3) may extend the carry forward period in the case of a subsidiary which had more than one fiscal period ending in a particular calendar year, the converse is also true; i.e. the carry forward period available may be shortened where it is the parent which had more than one fiscal period ending in a particular calendar year.

In the situation described above, subsection 88(1.3) would deem XXXXXXXXXX to have been in existence prior to XXXXXXXXXX when XXXXXXXXXX earned its ITC’s and XXXXXXXXXX would be deemed to have had fiscal periods ending on XXXXXXXXXX of each year from XXXXXXXXXX. Consequently, for the purpose of determining XXXXXXXXXX ITC, subparagraph 88(1)(e.3)(i) would deem the property acquired or expenditures made by XXXXXXXXXX in its taxation year ending XXXXXXXXXX to have been acquired or made by XXXXXXXXXX in its deemed taxation year ending on XXXXXXXXXX. Consequently, the ITC which XXXXXXXXXX claimed in its taxation year ending XXXXXXXXXX would fall within the carry-forward provisions set out in paragraph (c) of the definition of “investment tax credit” in subsection 127(9) of the Act.

With respect to the subsequent amalgamation of XXXXXXXXXX with XXXXXXXXXX to form Amalco, paragraph 87(2)(qq) of the Act is applicable for the purposes of determining Amalco’s entitlement to deduct any ITC’s carried forward. Paragraph 87(2)(qq) deems Amalco to be the same corporation as, and a continuation of each predecessor corporation. Since, as set out above, the ITC’s are deemed to have been earned by XXXXXXXXXX in its taxation year ending XXXXXXXXXX, Amalco’s carry-forward period as set out in paragraph (c) of the definition of “investment tax credit” in subsection 127(9) of the Act would expire following Amalco’s second taxation year.

We trust that our comments will be of assistance.

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch