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: Does subsection 66(12.6012) apply to deny the investment allowance in computing the taxable capital of an amalgamated corporation where subsection 66(12.6013) deems the taxable capital of the corporation to be equal to the combined taxable capital of each of the predecessor corporations?
Position: No.
Reasons: It would be inappropriate to deny an investment allowance in the circumstances
XXXXXXXXXX 2003-003828
Daryl Boychuk, LL.B
February 11, 2004
Dear XXXXXXXXXX:
Re: Application of Subsections 66(12.6012) and (12.6013)
We are writing in response to your letter of September 10, 2003 wherein you requested our views on whether subsection 66(12.6012) of the Income Tax Act (the "Act") applies, in the circumstances described below, to deny a corporation's investment allowance in the calculation of taxable capital under subsection 66(12.6011) of the Act. Specifically, you have asked us to provide our views on the application of these provisions where there is an amalgamation of a parent company ("Parentco") with its wholly-owned subsidiary ("Subco") to form "Amalco" and where Amalco enters into an agreement to issue flow-through shares after the amalgamation and before its first taxation year. Immediately before the amalgamation, Parentco had a substantial investment allowance under subsection 181.2(4) in respect of its shares of Subco.
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.
A principal-business corporation ("PBC") as defined in subsection 66(15) of the Act, may renounce specified Canadian development expenses ("specified CDE") to holders of flow-through shares pursuant to subsection 66(12.601) of the Act if the corporation's taxable capital amount at the time the consideration for the shares was given, was not more than $15,000,000.
For the purpose of determining the taxable capital amount of Amalco in the circumstances described above, subsection 66(12.6013) of the Act deems Amalco to have a taxable capital employed in Canada equal the total of all amounts each of which is the taxable capital employed in Canada of a predecessor corporation for the last taxation year that ended more than 30 days before the consideration for the issuance of the flow-through shares was given.
The taxable capital employed in Canada of a particular corporation is computed subject to the rule in subsection 66(12.6012). This subsection provides that a particular corporation's taxable capital employed in Canada for a taxation year is computed without reference to the investment allowance to the extent that the investment allowance is attributable to, among other things, shares of another corporation that was not associated with the particular corporation at the particular time and was associated with the particular corporation at the end of the particular corporation's last taxation year that ended 30 days before that time.
We acknowledge the difficulty in applying subsection 66(12.6012) if the reference to a "particular corporation" in that provision is a reference to the amalgamated corporation. In addition, we agree that subsection 66(12.6012) was not intended to reduce the investment allowance in the circumstances described above. Accordingly, in computing the taxable capital employed in Canada of Amalco (which is deemed to be the aggregate of the taxable capital employed in Canada of each of Parentco and Subco at the time specified in subsection 66(12.6013)), we would not rely on subsection 66(12.6012) to deny the investment allowance applicable to Parentco's shares in Subco.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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