11 October 2013 Roundtable, 2014-0537611C6 - Future income tax assets / Actif d'impôts futurs

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.

Principal Issues: This is the translation of the response that we gave to question 25 which was asked as part of the Round Table discussion on federal taxation at the 2013 Annual Conference of the Association de planification fiscale et financière. – Is a future income tax asset considered an asset that is used principally in an active business carried on in Canada for the purposes of the definition of "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) and for the purpose of the definition of "small business corporation" ("SBC") in subsection 248(1)? / Il s'agit de la traduction de la réponse que nous avons donnée à la question 25 qui nous a été posée dans le cadre de la Table ronde sur la fiscalité fédérale lors du Congrès annuel de 2013 de l'Association de planification fiscale et financière. - L'actif d'impôt futur peut-il être considéré comme un élément d'actif utilisé dans l'exploitation active d'une entreprise aux fins de la définition d'« action admissible de petite entreprise » (« AAPE ») prévue au paragraphe 110.6(1) et de la définition d'une « société exploitant une petite entreprise » (« SEPE ») prévue au paragraphe 248(1).

Position: In our view, a future income tax asset is not an asset for the purposes of the definition of SBC and of the definition of QSBCS. / Nous sommes d'avis qu'un actif d'impôt futur n'est pas un actif aux fins de la définition d'AAPE et de la définition de SEPE.

Reasons: The Act ; La Loi

ROUND TABLE DISCUSSION ON FEDERAL TAXATION OF OCTOBER 11, 2013
APFF – 2013 CONFERENCE

Question 25

Consequence of a future income tax asset on the qualification of a "qualified small business corporation share" and of a "small business corporation"

In technical interpretations 2000-001582 (footnote 1) and 2008-028530, (footnote 2) the CRA indicates that a future income tax asset presented on a corporation's balance sheet constitutes an asset for the purposes of the definition of a "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) of the ITA and of the definition of a "small business corporation" ("SBC") in subsection 248(1) of the ITA. However, the CRA also indicates that, for the purposes of the two definitions mentioned above, such a future income tax asset does not constitute an asset "used" in an active business carried on by the corporation.

Question to the CRA

Can the CRA confirm whether a future income tax asset can be considered as an asset used in carrying on an active business for the purposes of the definition of QSBCS in subsection 110.6(1) of the ITA and of the definition of SBC in subsection 248(1) of the ITA?

CRA's response

According to Section 3465, (footnote 3) "future income tax assets are the amounts of income tax benefits arising in respect of deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused income tax reductions, except for investment tax credits."

According to IAS 12, (footnote 4) "Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits."

Despite the terminological differences between Section 3465 and IAS 12, the CRA considers that there is no significant difference between the terms "future income tax assets" and "deferred tax assets" for the purposes of the two definitions mentioned above.

In short, to determine whether a share is a QSBCS, one must take into account, among other things, the fair market value of the assets used principally in an active business carried on by the corporation or a corporation that is related to it. The same applies in determining whether a corporation is a SBC.

The CRA is of the opinion that a future income tax asset is not an asset for the purposes of the definition of QSBCS and of the definition of SBC. Consequently, future income tax assets should not be taken into account when determining whether a share is a QSBCS or whether a corporation is a SBC.

When a future income tax asset becomes a tax receivable, the tax receivable must be considered as an asset in establishing whether a share is a QSBCS or whether a corporation is a SBC. For the purposes of the definition of QSBCS and of the definition of SBC, the tax receivable may constitute an asset used in carrying on an active business if the tax receivable originates from actively carrying on a business. For example, the CRA is of the opinion that, for the purposes of the two definitions, a tax receivable amount following a loss carry back from a business that is actively carried on, constitutes an asset used principally in an active business carried on by the corporation.

This interpretation of a future income tax asset represents a change in position from the response given to question 29 which was asked as part of the Round Table discussion on federal taxation at the 2008 Annual Conference of the Association de planification fiscale et financière. Likewise, the position stated in interpretation 2000-001582 no longer represents the CRA's opinion.

The same interpretation applies to deferred tax assets.

Anne Dagenais
2014-053761

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 CANADA REVENUE AGENCY, Technical Interpretation 2000-001582, October 2, 2000.
2 CANADA REVENUE AGENCY, Technical Interpretation 2008-028530, October 10, 2008.
3 "Income taxes", in CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS, CICA Handbook – Accounting, vol. I, Toronto, CICA.
4 International Financial Reporting Standards IAS 12, "Income Taxes".