3 June 2003 External T.I. 2003-0017995 - Corporate Instalments

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Does a prior year's dividend refund reduce a corporation's first instalment base?

Position: No.

Reasons: The law.

XXXXXXXXXX 2003-001799
Michael Cooke
June 3, 2003

Dear XXXXXXXXXX:

Re: Corporate Income Tax Instalments

This is in response to your letter dated May 9, 2003, wherein you requested our opinion on the computation of corporate income tax instalments under section 157 of the Income Tax Act (the "Act").

In your letter you describe a situation in which a corporation has Part I tax payable for its taxation year ending December 31, 2002 of $120,000. The corporation also has a dividend refund, within the meaning assigned by subsection 129(1) of the Act, of $150,000 in respect of that year. You indicate that the corporation is expecting to have Part I tax payable for its current taxation year ending December 31, 2003 in excess of $120,000; however, it is not expected to have any dividend refund in respect of that year. You then indicate that under the three instalment options described in paragraph 157(1)(a) of the Act, the corporation will base its monthly income tax instalments on the corporation's "first instalment base" as that term is defined in section 5301 of the Income Tax Regulations (the "Regulations") (i.e. 1/12th of its 2002 Part I income taxes payable).

You ask whether the corporation's first instalment base includes a reduction for the amount of its dividend refund (i.e. $150,000). It is your view, that since the amount of a corporation's dividend refund is calculated in section 129 of the Act and therefore, is included under Part I, such amount reduces the corporation's 2002 Part I income taxes payable. Consequently, in your view, the first instalment base of the corporation described above would be NIL.

Our Views

For the purpose of computing the three instalment methods described in paragraph 157(1)(a), a corporation must determine its Part I income taxes payable (and the taxes payable under any other Part referred to in that paragraph) without reference to the amount of any dividend refund. However, once a corporation's monthly instalments are determined under paragraph 157(1)(a), pursuant to paragraph 157(3)(b), a private corporation may reduce the amount of its monthly instalments by 1/12 of its dividend refund for the year. The year referred to in paragraph 157(3)(b) is the taxation year in which the instalment payments are being made. As noted in paragraph 20 of Interpretation Bulletin IT-243R4, since the amount of a private corporation's dividend refund for this particular taxation year may not be known at the time the instalments are computed the amount of any dividend refund must be estimated. The reduction to the monthly instalments by a corporation's dividend refund and other credits is also clearly reflected in Section C - Worksheet of the Corporation Instalment Guide 2003 (T7B Corp).

Consequently, in the example described above, the corporation's monthly income tax instalments for its 2003 taxation year using its first instalment base would be $10,000 and such instalments would not be reduced by 1/12th of the corporation's 2002 dividend refund of $150,000.¹

Our comments are provided in accordance with the practice described in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002.

Yours truly,

David Palamar
Section Manager
for Division Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ This assumes that the particular corporation's Part I income tax liability for its 2001 taxation year, and consequently, its "second instalment base", is greater than its first instalment base.

4
- -

2
- -