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: Impact on the Business limit reduction in first year ASPE is adopted.
Position: General comments.
Reasons: See response.
Tim Fitzgerald, CGA
January 4, 2012
Dear XXXXXXXXXX :
Re: Canadian Accounting Standards for Private Enterprises ("ASPE")
We are replying to your correspondence of October 26, 2011, concerning the impact of reporting assets at fair value under ASPE to the small business limit reduction in subsection 125(5.1) of the Income Tax Act ("Act").
Your concern is that the restatement of the closing balance of retained earnings in the comparative financial statements for the preceding fiscal period in the first year ASPE is adopted by a Canadian-controlled private corporation ("CCPC") might increase the small business limit reduction for purposes of the small business deduction ("SBD") in subsection 125(1) of the Act.
With respect to the year ASPE is adopted by a CCPC, you have asked whether the 2011 General Index of Financial Information ("GIFI") filed with the T2 corporate income tax return can be based on former Canadian Generally Accepted Accounting Principles ("GAAP"), which would not reflect the aforementioned one-time write up of assets under ASPE to fair value, even though the CCPC's 2011 financial statements would be prepared in accordance with ASPE.
The Canada Revenue Agency's views concerning the impact of the adoption/conversion from GAAP to International Financial Reporting Standards ("IFRS") are contained in Income Tax Technical News #42. These views would also apply to the impact of the adoption/conversion from GAAP to ASPE. Under ASPE, it is our understanding that a corporation's retained earnings for the particular year in which ASPE is first adopted will be affected by the reporting of its assets at fair value. In addition, ASPE would require that the corporation's prior year's retained earnings be restated accordingly for comparative purposes.
Pursuant to subsection 125(1) of the Act, the SBD for a particular taxation year is equal to 17% of the least of three amounts, which in general terms can be described as:
- active business income (paragraph 125(1)(a) of the Act);
- taxable income (paragraph 125(1)(b) of the Act); and
- the business limit (paragraph 125(1)(c) of the Act).
A CCPC's access to the SBD may be restricted by subsection 125(5.1) of the Act through the reduction of its annual business limit. One of the components used to determine the corporation's annual SBD business limit reduction in subsection 125(5.1) of the Act (as proposed for taxation years that begin after December 20, 2002) is "the taxable capital employed in Canada ...of the corporation for the preceding taxation year." It is the CRA's view that the reference to the preceding taxation year's taxable capital employed in Canada in the first year ASPE is adopted by the corporation would essentially be based on the amounts reported in its financial statements filed for that preceding year (based on GAAP) and not the restated amounts for that preceding year as presented under ASPE for comparative purposes only.
The GIFI is a standard list of codes used to report a corporation's financial statement information for the year and is filed with the corporation's annual T2 corporate income tax return along with the corporation's notes to the financial statements. Generally, the GIFI filed with the T2 return for the year should convey the same information as would the financial statements for the year. For further information concerning the filing of GIFI and the corresponding notes to financial statements, we refer you to the CRA's guide, RC4088, General Index of Financial Information, which is available on the CRA website.
We trust the comments above are helpful.
Michael Cooke, C.A.,
Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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