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: Where a corporation decides to report its assets under fair value for its 2010 year the corporation will restate its 2009 financial statements for the purpose of providing comparative results for its 2009 year. As a result, the corporation's Retained Earnings for 2009 and 2010 will be increased. 1. Is the corporation required to amend its 2009 tax return? 2. Will the increased Retained Earnings balance impact the Small Business Deduction limit? 3. Will the increased Retained Earnings balance impact the corporation's Ontario capital tax liability? 4. Is there any relief in respect of Ontario capital tax related to the increase in the Retained Earnings?
Position: 1. No. 2. The change in the Retained Earnings balance will not impact the small business deduction limit reduction in the 2009 or 2010 returns; however it will impact the limit reduction in the 2011 tax return. 3. Ontario capital tax for the 2009 taxation year is not impacted; however, it is for the 2010 taxation year. 4. No.
Reasons: 1. The restatement of a prior year's financial statements merely for comparative purposes in the corporation's current year's financial statements does not imply that the prior year's taxable capital is incorrect. 2. Generally, the business limit reduction in subsection 125(5.1) is based on the amount that would be the corporation's Part I.3 tax for the preceding year. The corporation is not required to base the amount that would be the Part I.3 tax for the corporation's 2009 taxation year on its restated, IFRS-based Retained Earnings balance. Accordingly, no change is required to the business limit reduction for the 2010 year. However, as the corporation files its 2010 return based on its IFRS financial statements, the 2010 IFRS-based Retained Earnings balance will impact the 2011 business limit reduction. 3. We do not view the restatement of the 2009 Retained Earnings as an error in respect of the originally filed 2009 return. 4. The Taxation Act, 2007 does not contain a provision that excludes the increase in Retained Earnings from taxable capital for Ontario capital tax purposes.
XXXXXXXXXX 2010-039060
S Fron
November 2, 2011
Mr. XXXXXXXXXX :
Re: Impact of Reporting Assets at Fair Value Under International Financial Reporting Standards on the Business Limit Reduction and Provincial Capital Taxes
We are responding to an email sent by a previous employee of your firm, concerning the impact of reporting capital assets at fair value in your client's (a non-financial institution) 2009 and 2010 financial statements. Your colleague noted that your client's retained earnings will increase as a result of the change, and asked whether the increased balance would be used in the determination of the corporation's taxable capital pursuant to section 181.2 of the Income Tax Act (the "Act") for purposes of the Small Business Deduction business limit reduction in subsection 125(5.1) of the Act. You noted that the corporation has chosen to adopt International Financial Reporting Standards (IFRS) for financial reporting purposes commencing with its December 31, 2010 year end. Accordingly, the corporation's 2009 financial statements will be restated merely for the purpose of including the 2009 year's results as comparative figures in the corporation's 2010 financial statements. Your colleague inquired as to whether the corporation is required to file an amended 2009 return to reflect the increased Retained Earnings, the impact on the corporation's Ontario capital tax, and whether any relief is available in respect of capital tax in 2009 and 2010.
Comments
As the corporation has decided to adopt IFRS prior to its 2011 year end, our comments in respect of Early Adoption of IFRS found in Income Tax Technical News #42 are applicable. We noted in ITTN #42 that references to generally accepted accounting principles (GAAP) in the Act can be read as references to IFRS. We offer these additional general comments.
Paragraph 18 of IT-532 - Part I.3 - Tax on Large Corporations concludes that where a material error of a prior period(s) is accounted for by restating the financial statements on a comparative basis, the restated comparative statements would not be used to re-determine the Part I.3 liability for the prior year. In our view, this policy applies in the current situation.
Our policy in respect of a reassessment of a return is provided in Information Circular IC-75-7R3 Reassessment of a Return of Income. In our view, former Canadian GAAP is the appropriate set of standards for fiscal years beginning before January 1, 2011. Therefore, the restatement of a prior year's results from GAAP to IFRS for the purpose of providing a set of comparative results is not an indication that the amounts reported on the corporation's prior year's tax return are incorrect. As a result, in the situation you have described, the corporation is not required (nor should it make a request) to amend its prior year (2009) return to reflect the change to Retained Earnings.
The corporation's IFRS-based Retained Earnings balance in 2010 will form part of the corporation's capital pursuant to subparagraph 181(3)(b)(i) and paragraph 181.2(3)(a) of the Act. Consequently, it will impact the corporation's taxable capital determined under subsection 181.2(2) of the Act.
Business Limit Reduction
Since one of the components used to determine the corporation's business limit reduction in subsection 125(5.1) of the Act is "the amount that would ... be the corporation's tax payable under Part I.3 for its preceding taxation year," the 2010 IFRS-based Retained Earnings will affect the corporation's 2011 Small Business Deduction business limit reduction.
The 2009 Retained Earnings balance is restated only for comparative purposes and does not impact the 2009 Part I.3 liability. Therefore, the corporation's 2010 Small Business Deduction business limit reduction is not impacted by the comparative restatement.
Ontario Capital Tax
For years after 2008, Ontario's capital tax base is harmonized with taxable capital determined under Part I.3 of the Act. Section 81 of the Taxation Act, 2007 (TA) defines taxable capital of a corporation other than a financial institution as "the amount that would be the corporation's taxable capital for the year as determined under section 181.2 of the [Act] if the amount of its capital, as determined under subsection 181.2(3) or that Act included its accumulated other comprehensive income at the end of the year".
Therefore, the IFRS-based Retained Earnings will likely affect the corporation's capital tax liability for the 2010 taxation year. The corporation will not be required to amend its 2009 tax return.
The TA does not include a provision that would allow a corporation to omit the increase in its taxable capital resulting from the inclusion of the IFRS-based Retained Earnings balance. However, clause 82(2)(b) of the TA provides that the capital tax rate is 0.15 per cent multiplied by the ratio of the number of days in the corporation's year that are after December 31, 2009 and before July 1, 2010 to the total number of days in the year. Accordingly, capital tax is effectively eliminated for regular corporations (non-financial institutions) for periods after June 30, 2010.
We trust the above comments are of assistance.
Lita Krantz, CA
Assistant Director
International & Trusts Division
Income Tax Rulings Directorate
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