15 September 2010 External T.I. 2009-0336001E5 - Transitional tax debit of a bankrupt

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: 1. At what point in time does a bankrupt corporation cease to have a permanent establishment (PE) in Ontario? 2. When is such a corporation liable to pay its remaining transitional tax debit balance?

Position: 1. Question of fact. 2. Depends on whether corporation has a PE in Ontario.

Reasons: The existence of a PE is a question of fact. If the corporation has become a bankrupt, its amortization period ends in the tax year in which, based on the facts, it ceases to have a PE in Ontario. The balance of the corporation's transitional tax debit is due in the tax year in which its amortization period ends.

XXXXXXXXXX
									2009-033600
									Saskia deLang-Lenters
September 15, 2010

Dear XXXXXXXXXX :

Re: Liability of a bankrupt corporation to pay remaining transitional tax debit balance

This is in reply to XXXXXXXXXX 's letter of August 5, 2009. His letter notes that according to the Ontario Ministry of Revenue's Information Bulletin 4011, a corporation's amortization period, in the case of the transitional tax debits and credits, ends when the corporation ceases to have a permanent establishment (PE) in Ontario for any reason other than an "eligible amalgamation" or "eligible post-2008 winding-up" of the corporation. He would like to know at what point a bankrupt corporation is considered to cease having a PE in Ontario and becomes liable for full payment of the remaining transitional tax debit balance.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments.

Our Comments

Sections 46 to 52 of the Taxation Act, 2007 (Ontario), (TA), govern the computation of a corporation's Ontario transitional tax debits and credits. A corporation must pay its transitional tax debits generally over a five-year period beginning with the corporation's first taxation year ending after December 31, 2008. This typically five-year period for which the transitional tax debit is calculated is referred to as the corporation's "amortization period".

There are a number of circumstances in which a corporation's amortization period is shortened. Subclause 46(2)(b)(ii) of the TA provides that the amortization period ends immediately before a corporation ceases to have a PE in Ontario for any reason other than an eligible amalgamation or eligible post-2008 winding-up of the corporation. The balance of the corporation's transitional tax debit is due in the tax year in which the amortization period ends, which is immediately before the corporation closes its Ontario PE. Your query does not appear to deal with an eligible amalgamation or an eligible post-2008 winding-up.

Subsection 1(1) of the TA defines "permanent establishment" for a corporation to have the same meaning assigned by Regulation 400(2) of the Income Tax Act, (Canada), (ITA).

Under subsection 400(2) of the Regulations, a PE of a corporation means a fixed place of business of the corporation, including an office, a branch, a mine, an oil well, a farm, a timberland, a factory, a workshop or a warehouse. Where a corporation does not have a fixed place of business, it may still be deemed to have a PE in a province if it meets any of the criteria in paragraphs 400(2)(a) to (g) of the Regulations.

Federal Interpretation Bulletin IT-177R2, Permanent Establishment of a Corporation in a Province, states at paragraph 2:

To determine if a corporation has a permanent establishment in a province, it is necessary to see if the corporation meets any of the criteria in subsection 400(2) of the Regulations. This will often involve questions of fact which must be answered by the circumstances of each case.

This bulletin, which provides additional guidelines regarding the Agency's interpretation of Regulation 400(2), can be found on our website at www.cra-arc.gc.ca.

Section 28 of the TA states that if a corporation is a bankrupt, subsection 128(1) of the ITA applies. Paragraph 128(1)(c) of the ITA states that where the corporation has become a bankrupt, the taxable income of the corporation for any tax year of the corporation during which it was a bankrupt or for any subsequent year shall be calculated as if the property of the corporation remained vested in the corporation. The business of the corporation may be carried on after the corporation has become a bankrupt.

When a corporation becomes a bankrupt, paragraph 128(1)(d) of the ITA deems a taxation year to have ended on the day immediately before the day the corporation became a bankrupt, and a new taxation year to have commenced on the day the corporation became a bankrupt. The fiscal period previously established pursuant to the definition thereof in subsection 249.1(1) of the ITA will continue to be the fiscal period of the corporation for taxation years subsequent to it becoming a bankrupt. The deemed taxation year end and commencement of a new taxation year have no bearing on whether the bankrupt corporation continues to have a PE in Ontario after it becomes a bankrupt. The trustee may close the PE(s) in Ontario at a later date at its discretion.

Where a corporation otherwise has no PE, the corporation will be deemed by regulation 400(2)(e.1) to have a PE at the place designated by its incorporating documents or bylaws to be its head office or registered office. Such a corporation that has designated its head office or registered office to be in Ontario will continue to have a PE in Ontario under regulation 400(2)(e.1) until the corporation finally dissolves. Where such a corporation has designated its head office or registered head office to be outside Ontario, the point in time that the corporation ceases to have a PE in Ontario is a question of fact.

If a corporation has become a bankrupt, its amortization period ends in the tax year in which, based on the facts, the corporation ceases to have a PE in Ontario. The balance of the corporation's transitional tax debit, if any, is due in the tax year in which its amortization period ends.

We trust you will find these comments helpful.

Yours truly,

Roger Filion
Assistant Director
for Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch