19 August 2013 Internal T.I. 2013-0474031I7 - Ontario Transitional Tax Debit/Credit

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: Whether the taxpayer's three separate requests to amend its federal and Ontario CCA/CEC claims and non-capital loss applications in years prior to the reference period are "tainting" transactions?

Position: Certain requested adjustments are tainting transactions. Subclause 46(2)(b)(v) and subsection 50(2) of the Ontario Act apply.

Reasons: One of the main reasons for requesting the change is to increase the transitional tax credit.

August 19, 2013

XXXXXXXXXX Income Tax Rulings Directorate
Large Case File Manager Julie White
XXXXXXXXXX Tax Services Office 905-721-5202

2013-047403

Ontario Transitional Tax Debit/Credit

This is in reply to your email dated December 19, 2012 in which you requested our comments on whether the taxpayer's requested adjustments to its federal and Ontario capital cost allowance claims and non-capital loss applications for the XXXXXXXXXX, XXXXXXXXXX and XXXXXXXXXX taxation years are a tainting transaction for purposes of the Ontario transitional tax debit/credit calculation under the Taxation Act, 2007 (TA). You also provided us with additional information in respect of the taxpayer's request on February 14, 2013.

Facts

The facts as we understand them are as follows:

• There was a change of control of the taxpayer resulting in a deemed year end of XXXXXXXXXX.
• The taxpayer is requesting a change to the Ontario undepreciated capital cost (UCC) balance, which is understated as a result of an error made in the carry forward balance during the last audit of the taxpayer's Ontario corporations tax. This change will result in an amendment to the transitional tax debit/credit calculation. The Compliance Programs Branch has confirmed and verified the error in the Ontario UCC balance. This balance is a component of the total Ontario balance in calculating the transitional tax debit/credit balance. As a result of this correction, the total Ontario balance will be amended and the calculation of the transitional tax debit/credit will be reassessed for the XXXXXXXXXX and later years. This correction is not considered to be a tainting transaction and no further comments are provided below.
• The taxpayer is requesting three additional adjustments to its "total federal balance" and "total Ontario balance" as set out below.

1. The taxpayer is requesting an increase to the federal CCA and CEC claimed and an increase to the federal non-capital losses. (Adjustment 1)

2. In addition to the above request the taxpayer is requesting a decrease in the Ontario CCA and CEC claimed in the XXXXXXXXXX and XXXXXXXXXX taxation years. (Adjustment 2) This results in a larger UCC balance and CEC balance. The changes requested in the CCA and CEC balances are offset, for income tax purposes, by changes to the Ontario non-capital loss balance for the same periods.

3. Subsequent to the taxpayer's request for the above adjustments, the corporation received competent authority adjustments in respect of cross-border transactions. The taxpayer has made a further request to amend its federal and Ontario discretionary deductions to eliminate the net increase in taxable income resulting from the competent authority agreement. (Adjustment 3) Additional details related to the request are provided below.

• The overall impact to the transitional tax debit/credit balance by the above three requests is to change the current transitional tax debit balance to a transitional tax credit balance of $XXXXXXXXXX. Each of these requests will be considered in light of the transitional tax debit/credit calculation.

Our Comments

Adjustment 1

We understand that you intend to process the taxpayer's requested adjustments for the federal UCC/CEC and non-capital losses in accordance IC 84-1 Revisions to Capital Cost Allowance and Other Permissive Deductions. The increase in the loss balance as a result of these changes is utilized by the taxpayer in the XXXXXXXXXX taxation year.

In calculating the difference between the "total federal balance" and the "total Ontario balance" the taxpayer is required to exclude non-capital losses incurred before a change of control pursuant to variable "L" in subsection 48(4) and variable "Z" in subsection 48(6) of the TA respectively. Were the corporation's non-capital losses included in the difference between the total federal and total Ontario balances, the corporation's total Ontario balance would have exceeded its total federal balance by $XXXXXXXXXX creating a transitional tax credit balance. Instead, the corporation's total federal balance exceeds the total Ontario balance by $XXXXXXXXXX creating a transitional tax debit balance. The exclusion of these losses puts the taxpayer at a disadvantage. The taxpayer's requested adjustments to the federal pool balances puts the taxpayer in a similar position to what it would have been had the non-capital losses not been removed from the total federal and total Ontario pool balances. We do not consider these changes to be tainting. As a result of these adjustments the corporation's federal non-capital losses available to carry forward after the taxpayer's XXXXXXXXXX tax year are approximately equal to its Ontario non-capital losses.

Adjustment 2

The taxpayer has also requested adjustments to the Ontario losses and CCA/CEC balances. It is these adjustments that we find offensive. The taxpayer is requesting a decrease to the CCA claims and an offsetting reduction to the non-capital losses. This will create a much larger transitional tax credit balance of $XXXXXXXXXX as the Ontario UCC/CECA balances are increased. The offsetting reduction in the Ontario non-capital losses has no effect on the pool balance difference because non-capital losses are excluded from the total Ontario balance.

Subclause 46(2)(b)(v) of the TA shortens the amortization period where there has been a transaction or event and it may reasonably be considered that one of the main purposes of the transaction or event was to reduce or avoid the inclusion of an amount to be added in the calculation of the transitional tax debit or to increase the amount of the transitional tax credit. In our view, the changes in the Ontario balances is an event in which one of the main purposes is to increase the transitional tax credit by the tax effect of the $XXXXXXXXXX change in the Ontario balance. The word "event" is not defined in the TA, and as such we must turn to the ordinary dictionary meaning. The word "event" is defined in the Concise Canadian Oxford Dictionary as:

1. a thing that happens or takes place, esp. one of importance. 2a. the fact of a thing's occurring. b. a result or outcome.

The event is the result or outcome of the changes to the CCA/CEC and non-capital loss claims which is the change to the UCC/CEC balance and the non-capital loss balance. The event happens before the reference period because the balances change at the end of the particular taxation year which is before the start of the reference period. Pursuant to subclause 46(2)(b)(v) the amortization period will end immediately after the start of the reference period. To calculate the actual transitional tax credit, subsection 50(2) considers the lesser of variables "A" and "B". In determining the amount for variable "B", clause (b) uses nil as the number of days in the corporation's amortization period that are in the taxation year over the number of days in the reference period (i.e. 1825 days) multiplied by the transitional tax credit balance which will result in a nil transitional tax credit. In other words, a single tainting transaction will result in the disallowance of the entire credit.

Adjustment 3

The taxpayer has also requested changes to the federal and Ontario pool balances as of XXXXXXXXXX, which are intended to offset the taxable income resulting from the competent authority agreement. We understand that the taxpayer has sufficient federal non-capital losses or the ability to claim federal CCA/CECA to offset the competent authority adjustments. The same can be said for the available Ontario discretionary deductions.

Notwithstanding that the deduction of each of these amounts are discretionary, in our view any difference in the application of federal CCA/CECA or losses compared to the application of Ontario CCA/CECA or losses would be a tainting transaction to which subclause 46(2)(b)(v) would apply. In other words, the taxpayer should ensure that the same amounts of CCA, CECA or losses are claimed for federal and Ontario purposes.

Based on our review of the proposed adjustments, the corporation appears to be using a combination of additional CCA and loss applications to offset the increase to federal taxable income. On the other hand, the taxpayer is claiming less Ontario CCA, and claiming more Ontario losses. It has been suggested that the excess of the total Ontario balance over the total federal balance would increase by $XXXXXXXXXX.

Conclusion

We do not find the taxpayer's request for Adjustment 1 to be offensive. Adjustments 2 and 3 are tainting transactions.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made to Ms. Sarah Depow at (613) 957-9228. In such cases a copy will be sent to you for delivery to the taxpayer.

I trust you find our comments helpful.

Steve Fron
Acting Manger
Trust Section II
Financial Industries and Trust Division
Income Tax Rulings Directorate