Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Using an example, we are asked how to complete Schedule 7
Position: General comments.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 24 Calculation of Total Investment Income and New Schedule 7 for Corporations
At the end of 2014, a new version of Schedule 7 to the T2 was available on the CRA Web site. A change to this schedule is found in line 062. In the earlier version of this schedule (2012), the wording of line 062 read as follows: "Taxable Dividends Deductible (Total of column F on Schedule 3)". In the most recent version (2014), the wording in line 062 now reads as follows: "Taxable deductible dividends (total of column F on Schedule 3 minus related expenses)".
Suppose that a Canadian-controlled private corporation ("CCPC") had the following income items for a taxation year: $400,000 of income from a Canadian active business; $14,000 of interest; $12,000 of rental income; $24,000 of public company dividends; an $18,000 taxable capital gain; and $10,000 of investment counselling fees (which helped generate the interest, dividends and capital gain). The corporation’s net income was $458,000, while its taxable income was $434,000 (after application of the deduction in computing taxable income for taxable dividends, of $24,000).
Under the definition of "aggregate investment income" (subsection 129(4)), the corporation would have aggregate investment income of $34,000, comprised of a taxable capital gain of $18,000 plus property income of $40,000 ($14,000 + $12,000 + $24,000 - $10,000), minus the dividend deduction from the taxable income of $24,000.
Questions to the CRA
(a) Can the CRA confirm that the aggregate investment income in the above example is $34,000?
(b) Can the CRA indicate which amounts are to be inserted in lines 032, 062 and 082 of Schedule 7 so that it is properly completed, based on the information provided in the above example?
CRA Response to Q.24(a)
The “aggregate investment income,” as defined in subsection 129(4), of a corporation for a taxation year, corresponds to the excess of the total of the amounts provided in paragraphs (a) and (b) of such definition over the total of the amounts each of which is a loss of the corporation from a property source. Paragraph (b) of the definition of “aggregate investment income” includes the total income for a year from property sources with the exception, among others, of “the portion of a dividend which is deductible in computing the corporation’s taxable income for the year.”
Paragraph 10 of Interpretation Bulletin IT-243R4 [f.n. Canada Revenue Agency, Interpretation Bulletin IT-243R4 (archived) Dividend Refund to Private Corporation February 12, 1996.] indicates that Canadian investment income is essentially the total of the following amounts but, as specified in paragraph 11 of that Interpretation Bulletin, with certain exclusions such as dividends deductible in computing taxable income:
(a) the total of income from property from sources situated in Canada, minus the total of expenses incurred to earn such income;
(b) the excess of taxable capital gains over allowable capital losses from sources situated in Canada.
Consequently, the total investment income for purposes of paragraph (b) of the definition of “aggregate investment income” is the net investment income without taking into account the deductible dividends or the expenses incurred for earning the dividend income.
In the context of the submitted example, it is not possible to confirm the aggregate investment income because it is missing information permitting the determination of the allocation of the investment counselling fee of $10,000 amongst the different sources of income, i.e., interest, dividends and capital gains. The taxpayer must allocate its fees in a reasonable manner amongst the different sources of income. In the submitted example, taking as given that the dividends are deductible in computing taxable income, the amount, calculated in conformity with paragraph (b) of the definition of “aggregate investment income” in subsection 129(4), is the rental and interest income minus a deduction for the portion of the investment fee allocable to the interest income. The amount added under paragraph (a) of the definition of “aggregate investment income” in subsection 129(4) would be equal to the eligible portion of the taxable capital gain.
CRA Response to Q. 24(b)
The calculation of the aggregate investment income from all sources is found in section 1 of Schedule 7 to the T2. In the submitted example, the total of the income from property to be entered in line 032 of such Schedule is the total of the net income from interest, rents and dividend income.
Since dividends which are deductible in the computation of taxable income are expressly excluded from aggregate investment income, the amount entered in line 062 of such Schedule is the amount of the deductible dividends less the expenses incurred to earn such income. In this way, the amount of the deductible dividends which is included on line 0329 (the net amount) is excluded from the aggregate investment income in line 062.
Line 082 of such Schedule serves to reduce the aggregate investment income by the total of losses from property. There does not appear to be any loss from property in the submitted example.
Isabelle Landry
(450) 623-0193
October 9, 2015
2015-059826
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Interpretation Bulletin IT-243R4 (archived), Dividend Refund to Private Corporations, February 12, 1996.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2015
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2015