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Principal Issues: Whether the general deduction from tax provided for in subsection 123.4(2) will be increased when a corporation has the right to deduct an amount pursuant to subsection 125(1) but does not deduct such an amount.
Reasons: The full rate taxable income (as defined in subsection 123.4(1)), computed for the purpose of the general deduction from tax, would be reduced by the least of the amounts determined under paragraphs 125(1)(a) to (c) in respect of the year (the amounts needed to compute the amount that would be deductible pursuant to subsection 125(1)) even if no amount is deducted pursuant to subsection 125(1).
ROUNDTABLE ON THE TAXATION OF INDIVIDUALS
CPA SYMPOSIUM ON THE TAXATION OF INDIVIDUALS
1.1) Not claiming the SBD federally
Subsection 125(1) indicates that a corporation that is a CCPC may deduct from its tax otherwise payable for the year an amount equal to the product of the small business deduction rate for the taxation year (17.5% in 2017 ) multiplied by the least of the amounts set out in paragraphs 125(1)(a), (b) and (c). It is recognized that the use of the word may in the context of a deduction ("may deduct") by the legislator indicates that this is a discretionary deduction.
Under variable "D" in the definition of GRIP under subsection 89(1), "adjusted taxable income" is the relevant element that increases the GRIP. This expression is also defined in subsection 89(1) and represents the part of the corporation's taxable income for the year that is not subject to the SBD and does not represent "aggregate investment income" (footnote 1). This definition refers to "the amount… deducted by the corporation under subsection 125(1) for the taxation year." We understand, therefore, that where a corporation elects not to deduct the SBD in computing its tax payable in respect of its ABI for a given taxation year, its GRIP account is generally increased accordingly (footnote 2) .
However, the definition of "general deduction from tax" (GDT) provided under subsection 123.4(2) does not refer to the concept of "adjusted taxable income" but rather to the concept of "full-rate taxable income". Under subsection (b) of the definition of this expression in subsection 123.4(1), it is the least of the amounts determined under paragraphs 125(1) (a) to (c) in respect of the corporation for the year that is taken into account. Consequently, the fact that a corporation does not deduct the SBD whereit has the right to do so will not have the effect of increasing its GDT.
For taxation years that begin after December 31, 2016, a Québec corporation that cannot benefit from the applicable Québec SBD for the year because the test of 5,500 hours worked is not met, could benefit from not receiving the SBD at the federal level. Although the combined corporate tax rate would rise from 22.3% to 26.9%, a benefit from not accessing the federal SBD would result from the fact that the entire ABI generated by the corporation could be distributed as eligible dividends.
QUESTION TO CRA:
Could you confirm our interpretation in the above situation to the effect that a CCPC, that determines not to deduct the SBD to which it is entitled in computing its federal tax , will not be entitled to the GDT?
The GDT, as defined in subsection 123.4(2), is the product obtained by multiplying the general rate reduction percentage for the year by the corporation’s full-rate taxable income for the year.
The term “full rate taxable income” is defined in subsection 123.4(1). Paragraph (b) of that definition applies when the corporation is a CCPC. For such a corporation, the taxable income subject to tax under subsection 123(1) will be reduced inter alia by the least of the amounts respecting the corporation's year set out in paragraphs 125(1)(a) to (c).
The amounts determined under paragraphs 125(1) (a) to (c) are the amounts used to determine the amount that could be deducted by the CCPC as a SBD. Thus, the least of the amounts determined in respect of the corporation for the year is the amount that qualifies for the SBD regardless of whether or not a SBD is claimed.
Consequently, a CCPC may choose not to deduct an amount as a SBD, but the least of the amounts determined under paragraphs 125 (1) (a) to (c) would nevertheless reduce taxable income in the computation of its "full rate taxable income" used in the calculation of the GDT under subsection 123.4(2).
February 2, 2017
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Defined under subsection 129(4)
2 You have confirmed our interpretation in the context of technical interpretation number 2016-0648481E5 dated June 20, 2016.
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