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: What are the consequences under Ontario's transitional tax dr/cr if a private corporation voluntarily dissolves and distributes its net assets to its shareholders in a tax year after 2008? What if the corporation incurs a non-capital loss for the year?
Position: When the corporation ceases to have a permanent establishment in Ontario, it must pay its remaining (unamortized) Ontario transitional tax debits in the tax year, or it may claim any remaining Ontario transitional tax credits against a prorated portion of its Ontario income tax payable for the year. Incurring a non-capital loss usually means the corporation has no Ontario income tax payable for the year and its transitional tax credits cannot be applied.
Reasons: A corporation typically ceases to have a permanent establishment when it distributes its net assets to its shareholders during the tax year. However, the corporation may continue to have a deemed permanent establishment in Ontario at its registered or head office under regulation 400(2)(e.1) in which case the corporation will cease to have a permanent establishment in Ontario when it formally dissolves.
September 17, 2010
Rickaye Low John Haalboom
Manager, Audit Division Ontario Corporate Tax Division
Toronto West Tax Services Office Income Tax Rulings Directorate
Q and As for Toronto West Tax Practitioners Group Newsletter
November 4, 2009 Meeting
As you requested, we have prepared an answer to a question raised at the November 4, 2009 meeting of the Toronto West Tax Practitioners Group, so that the question and answer can be published in the next Toronto West Tax Practitioners Group Newsletter.
What are the implications under Ontario's transitional tax debits and credits where a private corporation operating in Ontario voluntarily dissolves and distributes its net assets to its shareholders (individuals) in a tax year ending after 2008? Assume that the corporation incurs a non-capital loss for the year in which it distributes its net assets.
Ontario's transitional tax debits and credits generally apply to a corporation that was subject to tax in Ontario for its 2008 tax year under the Corporations Tax Act because it had a permanent establishment in Ontario in the year, and the corporation continues to be subject to tax in Ontario for its 2009 tax year under the Taxation Act, 2007, because it has a permanent establishment in Ontario at the beginning of its 2009 tax year.
Transitional tax debits and credits generally start at the beginning of the 2009 tax year and end five calendar years later but no later than December 31, 2013. For most corporations, the tax debits or credits are amortized over five calendar years and typically 1/5 of the total transitional tax debit (or credit) is paid (or applied) each tax year. However, when a corporation that is subject to Ontario's transitional tax debits and credits ceases to have a permanent establishment in Ontario during the five year period, its remaining unamortized transitional tax debits or credits are accelerated:
- The remaining transitional tax debits are payable for the tax year in which the corporation ceases to have a permanent establishment in Ontario.
- The remaining transitional tax credits can be applied against the Ontario corporate income tax payable (footnote 1) for the year in which the corporation ceases to have a permanent establishment in Ontario.
The case at hand is the dissolution of a private corporation where it distributes its net assets to individuals who are its shareholders. This type of dissolution is not a winding-up to which subsection 88(1) of the Income Tax Act (Canada) applies, so the special rules for an "eligible post-2008 winding-up" and an "eligible pre-2009 winding-up" in subsection 51(1) of the Taxation Act, 2007 do not apply.
The issue for Ontario's transitional tax debits and credits becomes the timing of when the private corporation ceases to have a permanent establishment in Ontario.
The corporation will close its Ontario permanent establishment(s) or will cease to have the permanent establishments(s) as a result of distributing the net assets to the shareholders. At that time, where the corporation has no other permanent establishment, the corporation will be deemed by regulation 400(2)(e.1) to have a permanent establishment at the place designated in its incorporating documents or bylaws as its head office or registered office. A corporation that has designated its registered office or head office to be in Ontario will continue to have a permanent establishment in Ontario under regulation 400(2)(e.1) until the corporation formally dissolves. Where a corporation has designated its registered office or head office outside Ontario, the point in time that the corporation ceases to have a permanent establishment in Ontario is a question of fact.
Also for the case at hand, the corporation is assumed to incur a non-capital loss for the tax year in which it distributes its net assets. Having incurred a non-capital loss, the corporation likely does not owe Ontario corporate income tax for the tax year. In this event, the corporation cannot apply in the year any remaining transitional tax credits that it has. As Ontario's transitional tax credits are not refundable, the remaining transitional tax credits of the corporation will effectively expire in the year.
I trust that this information will be useful for publishing in the Toronto West Tax Practitioners Group Newsletter.
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 For this purpose, the Ontario corporate income tax payable for the year is the Ontario corporate income tax for the year before deducting the Ontario Research and Development Tax Credit, the Corporate Minimum Tax Credit, and any refundable tax credits. Also, the tax payable amount is prorated by the number of days in the corporation's amortization period in the year divided by the total days in the tax year. A corporation's amortization period ends immediately before the corporation ceases to have a permanent establishment in Ontario.
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