12 June 1989 Income Tax Severed Letter AC58170 - Small Business Deduction and Resource Allowance

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.

5-8170
                                             Allan B. Nelson
                                             613-957-8984
     19(1)

June 12, 1989

Dear Sir:

We are writing in response to your letter dated May 30, 1989, wherein you described the following situation.

                                                     24(1)

You have asked for our interpretation of the Act to determine:

1.   Whether a negative balance in the Canadian development      
     expense account creates income eligible for the small        
     business deduction if the income earned from the production of
     oil from the well is active business income;
         and

2. Whether recaptured capital cost allowance is included in the calculation of the company's resource allowance.

You note the filing deadline of June 30 for the company's T2 return and request a prompt response from us.

As you are dealing with a specific case, we would need to know more of the facts peculiar to that case before we could give you our opinion, thereon. However, we are ale to provide you with the following general comments concerning the topics raised in your letter which may be of assistance to you.

1. Where "a Canadian-controlled private corporation" engaged in an "active business", as those terms are defined in paragraph 125(7)(a) and (b) of the Act, sells one of its two oil and gas wells located and utilized in that active business in Canada, and the sale thereof results in that corporation having a negative cumulative Canadian development expense ("CCDE") pool, that corporation must report that negative CCDE amount as income, pursuant to paragraph 59(3.2)(c) of the Act.

It is our view that such income would be characterized as being part of the corporation's active business income for purposes of the small business deduction outlined in subsection 125(1) of the Act.

We would not consider the amount of the negative CCDE pool to be investment income, as defined in subsection 129(4) of the Act, for the following reasons:

     (i)  The negative CCDE pool which resulted from the          
          sale of an oil and gas well, would not constitute a
          capital gain for the purposes of subparagraph
          129(4)(a)(i) of the Act.  Subparagraph 39(1)(a)(ii) of
          the Act excludes gains from the sale of Canadian resource
          properties from capital gains treatment; and

     (ii) The amount of the negative CCDE pool would be           
          specifically excluded from being treated as income      
          from for purposes of subparagraph 129(4)(a)(ii) of      
          the Act, by virtue of the provisions of either          
          paragraph 129(4.1)(b) or (c) of the Act.

2. If in the general scenario outlined above, the sale of an oil and gas well resulted in the corporation having recaptured capital cost allowance, as defined in subsection 13(1) of the Act, it is our position that the amount of the recapture would be included in the company's computation of resource profits pursuant to subsection 1204(1) of the Regulations and would thereby be included in the calculation of the company's resource allowance provided for in subsection 1210(1) of the Regulations.

It is important to note that the recaptured capital cost allowance would only be included in the corporation's resource profits to the extent that the capital cost allowance previously claimed on those assets originally reduces the amount of the company's resource profits. The above comments are expressions of opinion only and as such are not to be construed as advance income tax rulings, nor are they binding on the Department.

We hope the above will be of assistance to you.

Chief Resource Industries Section Bilingual Services & Resource Industries Division Rulings Directorate