25 August 2011 Internal T.I. 2011-0396021I7 - Reallocation of Interest

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 interest can be reallocated pursuant to s.161.1 between a predecessor corporation prior to an amalgamation and the new corporation resulting from the amalgamation.

Position: The company can request a re-appropriation of tax paid under 221.1(1). The amount re-appropriated reduces the amount of arrears owed on that account. Any remaining arrears interest would need to be dealt with by operation of s.220(3.1).

Reasons: See below.

									August 25, 2011

	XXXXXXXXXX  Tax Services Office			HEADQUARTERS
									Income Tax Rulings
	Attention:	XXXXXXXXXX 	  					Directorate
			Large Case File Manager			Richard Aronoff
									(613) 941-7239

									2011-039602

Reallocation of Credits Between Two Corporations

This relates to the letter of February 11, 2011 from XXXXXXXXXX . XXXXXXXXXX asked whether a reallocation under section 161.1 of the Income Tax Act would be permitted where the reallocation is between two separate corporate income tax accounts showing the same root business number. The facts are as follows.

In XXXXXXXXXX , a parent operating company completed a short-form vertical amalgamation with a wholly owned subsidiary under the Canada Business Corporations Act. The amalgamated company continued to operate under the same name as the parent company and continued as an operating company that XXXXXXXXXX in Canada.

Following the amalgamation, the amalgamated company continued to operate under the same root business number as the parent company, except that the corporate tax account associated with the business number had the suffix XXXXXXXXXX as opposed to XXXXXXXXXX . XXXXXXXXXX was the suffix of the corporate tax account of the parent company prior to the amalgamation. Upon the amalgamation, all remittance activity in the XXXXXXXXXX account ceased and activity in the XXXXXXXXXX account commenced. There was no co-mingling of tax between the two accounts and all payments relate to activity of the original parent operating company.

Following a series of reassessments, the parent company is currently owed refund interest resulting from an overpayment of tax in respect of its XXXXXXXXXX taxation year. The amalgamated operating company, on the other hand, owes arrears of interest in respect of its XXXXXXXXXX taxation year. The amalgamated company requests an offset under section 161.1.

Whether section 161.1 applies here need not be determined. The amalgamated company could request that an amount previously paid by the parent company in its XXXXXXXXXX taxation year on account of its corporate taxes be re-appropriated pursuant to subsection 221.2(1) and applied to the account of the amalgamated company's taxes for its XXXXXXXXXX taxation year. The re-appropriated payment would reduce or eliminate taxes owing in the XXXXXXXXXX taxation year to the extent of the amount that is re-appropriated.

The wording in section 221.2 clearly provides that the re-appropriation can only be made to a year in which an amount "is or may become payable". The provisions do not contemplate the refund of a statute barred amount, but rather its re-appropriation to an amount that is either payable or that may become payable. The inclusion of the words "may become payable" suggests a reasonable anticipation of an indebtedness in the subsequent year. The provisions of section 221.2 are discretionary, see Emcon Services Inc. v. The Queen, [2009] 3 C.T.C. 2121, 2008 DTC 4854 (T.C.C.), at ¶ 20. Those provisions do not permit a refund of an overpayment of tax, rather they give the Minister the discretion to re-appropriate an amount from one debt to another.

In this regard, the re-appropriation would need to be proportionate to the anticipated indebtedness. For instance, a statute barred overpayment of tax in the amount of $100,000 could not be re-appropriated in anticipation of a $1,000 amount payable. Such a re-appropriation would amount to nothing less than a backdoor override of subsection 164(1). Similarly, the repayment of an amount already paid in order to create an amount payable for the purpose of enabling the re-appropriation of a statute barred tax overpayment would be equally offensive and would amount to an indirect refund in complete disregard of subsection 164(1).

In respect to the arrears interest on the amount owing for the XXXXXXXXXX taxation year, it should be noted that paragraph 221.2(1)(a) provides that the amount re-appropriated from one account to another will be treated as though it had never been paid on account of the first debt, and had initially been a payment in respect of the second. Accordingly, the provision avoids arrears interest being charged on the second account to the extent that the amount re-appropriated reduces the amount of arrears owed on that account.

As concerns any remaining amount of interest owing and owed, there exists the possibility of waiving interest pursuant to subsection 220(3.1). This is a separate and unrelated issue to interest being reduced through re-appropriation. This is a matter that XXXXXXXXXX would need to discuss with you. Needless to say, the amalgamated company would need to be able, under the applicable corporate legislation, to make the request on behalf of the former parent company, as a continuation of that company.

Please note that XXXXXXXXXX has been advised to contact you in this matter. Should you have any queries or require additional information in regard to this matter, please do not hesitate to contact Richard Aronoff at the telephone number provided at the outset of this letter.

Yours truly,

B.J. Skulski
Manager
Insolvency and Administrative Law Section
Income Tax Rulings Directorate