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: Is a corporation entitled to increase its SR & ED expenditures in the 2001 taxation year by the amount of the ITCs that relate to a prior year's qualified expenditures when the same expenditures qualified for the Ontario Super Allowance.
Position: Yes
Reasons: Subsection 12(2.1) of the CTA prevents a corporation from deducting the Super Allowance and the section 11.2 incentive in the same taxation year. The CTA does not contain a provision that prevents both incentives from being calculated on the same qualified expenditures.
June 10, 2010
XXXXXXXXXX Tax Services Office HEADQUARTERS
Audit Division A. Townsend, CMA
(905) 721-5218
Attention: XXXXXXXXXX 2009-032306
Section 11.2 of the Corporations Tax Act
This is in reply to your memorandum of May 15, 2009 asking if XXXXXXXXXX is entitled to increase its deduction pursuant to subsection 11.2(3) of the Ontario Corporations Tax Act ("CTA"), by the amount of the prior year's federal Investment Tax Credits ("ITCs") for Scientific Research and Experimental Development ("SR & ED"). We apologize for our delay in responding.
Our understandings of the relevant facts in this situation, upon which we have based our views, are as follows:
Facts
1. XXXXXXXXXX and XXXXXXXXXX amalgamated on XXXXXXXXXX to form XXXXXXXXXX . It is our understanding that the amalgamation did not result in an acquisition of control of XXXXXXXXXX or XXXXXXXXXX . The Ontario allocation for XXXXXXXXXX is 100%.
2. In its taxation year ended on December 30, 2000, XXXXXXXXXX deducted pursuant to subsection 12(2) of the CTA, the Ontario Research and Development Super Allowance ("Super Allowance") from its Ontario taxable income in the amount of $XXXXXXXXXX . This amount was later reassessed by audit to $XXXXXXXXXX .
3. In its taxation year ended on December 30, 2000, XXXXXXXXXX had a revised ITC of $XXXXXXXXXX on $XXXXXXXXXX of "qualified expenditures" as defined in subsection 127(9) of the federal Income Tax Act ("ITA"). The ITC was deducted under subsection 127(5) of the ITA.
4. For its taxation year ended on December 30, 2000, XXXXXXXXXX had SR & ED expenditures of $XXXXXXXXXX that were qualified expenditures as defined in subsection 127(9) of the ITA and earned an ITC of $XXXXXXXXXX . The ITC was deducted under subsection 127(5) of the ITA. XXXXXXXXXX also had an ITC for the previous taxation year that was deducted in the December 30, 2000 taxation year. The taxpayer was informed by audit that it could claim the Super Allowance for that year.
5. XXXXXXXXXX first taxation year after amalgamation ended on December 29, 2001. In that year, pursuant to subsection 11.2(3) of the CTA, XXXXXXXXXX increased the amount of its SR & ED expenditures deduction by the ITCs claimed by XXXXXXXXXX and XXXXXXXXXX in the amount of $XXXXXXXXXX and $XXXXXXXXXX respectively. The ITCs related to "qualified expenditures" by virtue of subsection 12(1) of the CTA and were incurred by XXXXXXXXXX and XXXXXXXXXX in the taxation year ended on December 30, 2000. These expenditures also qualified for the Super Allowance in the taxation year ended December 30, 2000.
Audit's Position
6. In the year ended December 29, 2001, the taxpayer is not entitled to claim the incentive pursuant to subsection 11.2(3) of the CTA since it claimed the Super Allowance on the same SR & ED expenditures in the taxation ended December, 2000.
7. Audit is of the view that the SR & ED expenditures were related to a non specified taxation year since it started on January 3, 2000 and not after February 29, 2000.
8. It is Audit's opinion that the Ontario government did not intend to give an incentive twice on the same expenditures.
9. Furthermore, the taxpayer does not qualify for the exception to the specified taxation year under subsection 11.2(2) of the CTA since it did not have a short taxation year in 2000. Consequently, it is audit's view that the taxpayer does not have a first specified taxation year.
Taxpayer's Position
10. The taxpayer is of the view that XXXXXXXXXX taxation year ending on December 29, 2001 is a "specified taxation year" as defined under subsection 11.2(1) of the CTA since it commenced after February 29, 2000. Furthermore, the December 29, 2001 taxation year is also XXXXXXXXXX first specified taxation year as this is the first taxation year to which the definition of specified taxation year applies.
11. The ITC included in income for the December 29, 2001 taxation year related to expenditures incurred in the December 30, 2000 taxation year. These expenditures are "qualified Ontario SR&ED expenditures" pursuant to the definition of that expression in subsection 11.2(1) of the CTA as they are incurred in the taxation year immediately preceding XXXXXXXXXX first specified taxation year.
12. In the taxpayer's opinion, the intent of the Ontario government was clearly to allow the deduction in 2001 and that subsection 11.2(3) of the CTA does not limit the deduction on the basis that the Super Allowance was claimed on those expenditures. To the opposite, the Ontario legislature turned its mind to the possibility of overlap between section 11.2 of the CTA and section 12 of the CTA and expressed its intention with respect to any doubling up concern in subsection 12(2.1) of the CTA. Based on subsection 12(2.1) of the CTA and the absence of any similar provision in section 11.2 of the CTA, it is in the taxpayer's view that the Ontario Legislature intended that no deduction could be claimed under section 12 of the CTA for a year that is a specified taxation year within the meaning of section 11.2 of the CTA. However, claiming a deduction under section 12 in a prior year would not reduce the amount of the deduction claimed under section 11.2 in a specified taxation year.
Section 11.2 of the CTA was introduced in the Ontario 2001 Budget as an incentive to replace the Super Allowance and to continue to encourage corporations to perform SR & ED in Ontario. Subsection 11.2(3) of the CTA allows a corporation to increase its Ontario SR & ED expenditures in a specified taxation year by the amount of the federal ITCs related to qualified Ontario SR & ED expenditures. Section 11.2 of the CTA also contains other adjustments where the federal ITCs reduced the capital cost or undepreciated capital cost of a depreciable property used in SR & ED or the adjusted cost base of an interest in a partnership. The effect of section 11.2 of the CTA is to make the federal ITCs non-taxable for Ontario purposes.
A "qualified Ontario SR & ED expenditure" as defined in subsection 11.2(1) of the CTA includes, among other things, a qualified expenditure within the meaning of subsection 12(1) of the CTA that is made or incurred by a corporation in a specified taxation year or in the taxation year immediately preceding the first specified taxation year of the corporation.
Pursuant to subsection 12(1) of the CTA a qualified expenditure includes, among other things, an expenditure made by a corporation in respect of SR & ED carried on in Ontario that is a qualified expenditure for the purposes of earning ITCs pursuant to section 127 of the ITA.
A specified taxation year is defined in subsection 11.2(1) of the CTA as "....a taxation year of the corporation that commences after February 29, 2000 and ends before January 1, 2009". Subsection 11.2(2) of the CTA provides an exception to this definition and reads:
" (2)Exception, specified taxation year
Despite the definition of "specified taxation year" in subsection (1), a corporation's first specified taxation year for the purposes of this section is its first taxation year commencing after December 31, 2000, if its first taxation year that commences after February 29, 2000 ends before January 1, 2001."
Consequently, a specified taxation year means a year that commences after February 29, 2000 and ends after December 31, 2000, but before January 1, 2009. Generally, a corporation's first specified taxation year is its first taxation year ending in 2001. However, in the situation where a corporation has a short taxation year that commences after February 2000 and ends prior to January 1, 2001, subsection 11.2(2) of the CTA provides an exception such that its first specified taxation year will be its first taxation year commencing after December 31, 2000. First specified taxation year as that term is used in section 11.2 is not a defined term.
If a first specified taxation year was a defined term most corporations would not be able to deduct either incentive in the 2001 taxation year. XXXXXXXXXX , the "double counting" of expenditures for both the Super Allowance and the ITCs for SR & ED Incentive is intentional.
The deduction provided by section 11.2 of the CTA is intended to exclude from Ontario taxable income that portion of the federal ITC subtracted from the SR&ED pool that relates to qualifying Ontario SR&ED expenditures. The section 11.2 incentive is available in year 2, when the ITC is subtracted from the SR&ED pool, provided the Ontario SR&ED expenditures were incurred in a "specified taxation year".
In order to offset the time-lag inherent in this approach, Ontario R&D expenditures incurred in the corporation's taxation year immediately preceding the first "specified taxation year" will qualify for the Ontario deduction under section 11.2. Therefore, some expenditures which qualify for the Super Allowance in the year preceding the first "specified taxation year" will also qualify for the section 11.2 incentive.
In the present situation, XXXXXXXXXX December 31, 2001 taxation year commenced after February 2000 and ended after December 31, 2000, therefore it meets the definition of a "specified taxation year" in subsection 11.2(1) of the CTA. Furthermore, it is XXXXXXXXXX first specified taxation year.
XXXXXXXXXX predecessor corporations, XXXXXXXXXX and XXXXXXXXXX , both earned ITCs on qualified Ontario SR & ED expenditures incurred in their final taxation years ending in the 2000 year. The 2000 taxation year is the taxation year immediately preceding XXXXXXXXXX first specified taxation year. XXXXXXXXXX included the amount of these ITCs under paragraph 37(1)(e) of the ITA in determining the amount otherwise deductible for SR & ED expenditures for the December 29, 2001 taxation year. As the ITCs relate to qualified expenditures by virtue of subsection 12(1) of the CTA and these expenditures were incurred in the taxation immediately preceding XXXXXXXXXX first specified taxation year, we are of the view that those expenditures are qualified Ontario SR & ED expenditures pursuant to the definition of that expression in subsection 11.2(1) of the CTA. Therefore, XXXXXXXXXX is entitled to the incentive on these expenditures pursuant to subsection 11.2(3) of the CTA for the December 29, 2001 taxation year.
We trust the above comments will be of assistance to you.
Lita Krantz, CA
Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
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