26 November 2002 External T.I. 2002-0157415 - BUSINESS LIMIT-MULTIPLE YEAR END

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: Whether par. 125(5)(a) of the Act requires a corporation to be associated with the same particular corporation for 2 or more taxation years ending in a calendar year to apply.

Position: Yes.

Reasons: Wording of the provision.

XXXXXXXXXX 2002-015741

P. Massicotte, CA, M.Fisc.

November 26, 2002

Dear XXXXXXXXXX:

Re: Small Business Deduction - Business Limit

We are writing in reply to your letter of August 7, 2002, regarding the allocation under section 125 of the Income Tax Act (the "Act") of the business limit among associated corporations with multiple taxation years ending in the same calendar year. Specifically you requested we confirm whether your interpretation of paragraph 125(5)(a) of the Act was correct in the situation submitted.

The material facts indicated in your request are as follows:

1. Xco and Yco were associated corporations for the purposes of the Act at their March 31, 2000 year-end. They were not associated with any other corporation at that time.

2. The business limit was allocated for March 31, 2000 between Xco and Yco such that Xco received $180,000 and Yco received $20,000.

3. As at March 31, 2000, Zco was not associated with any other corporation.

4. Zco has a December 31, 2000 year-end.

5. Zco's allocation of the business limit for its December 31, 2000 year-end is nil.

6. On April 1, 2000, Zco purchased all the issued and outstanding shares of Yco in an arm's length transaction. Accordingly, Yco became associated with Zco as of this date and severed its association with Xco. Yco did not elect under subsection 256(9) of the Act.

7. Following the purchase of all the issued and outstanding shares of Yco, Yco chose to have a taxation year-end of December 31, 2000 to coincide with its new parent corporation.

8. Xco, Yco and Zco are all Canadian-controlled private corporations as defined in subsection 125(7) of the Act.

You ask whether, in the circumstances above, the maximum business limit available to Yco for its December 31, 2000 year-end, before any proration for the short taxation year, would be limited to $20,000 (the amount allocated to it for its March 31, 2000 year-end) or whether Yco may be allocated all of the $200,000 business limit that is not allocated to Zco (subject to the proration for the short taxation year).

In your opinion, the situation described above is outside the ambit of paragraph 125(5)(a) of the Act because Yco is not associated with the same other corporation in 2 or more taxation years ending in the same calendar year. As a result, you submit that Yco could be allocated a business limit of up to $200,000 (prorated pursuant to paragraph 125(5)(b) of the Act for the short taxation year) for the taxation year ended December 31, 2000, its second taxation year ending in the calendar year 2000.

Our Comments

Written confirmation of the tax implications arising from proposed transactions is given by this Directorate only where the transactions are the subject matter of an advance income tax ruling request pursuant to Information Circular 70-6R5. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide you with the following general comments.

Paragraph 125(5)(a) of the Act applies where a Canadian-controlled private corporation (the "first corporation") has more than one taxation year ending in the same calendar year and it is associated in two or more of those taxation years with another Canadian-controlled private corporation that also has a taxation year ending in that calendar year. In such cases, for each second and subsequent taxation year, in which the first corporation is associated with the other corporation and ending in the particular calendar year, the business limit for the first corporation will be equal to the lesser of: (i) the business limit allocated to it in its first such taxation year ending in the calendar year, and (ii) the business limit allocated to it for the particular subsequent taxation year ending in the calendar year. As you mentioned, this restricted business limit is also subject to the proration rule in paragraph 125(5)(b) of the Act.

Based on the facts described above, we agree with your interpretation of the provisions in paragraph 125(5)(a) of the Act. In our view, because of the references to "another Canadian-controlled private corporation" and to "the other corporation", it is necessary that a particular corporation having more than one taxation year ending in the same calendar year be associated with the same other corporation in two or more of those taxation years for paragraph 125(5)(a) of the Act to apply. In the situation submitted, as Yco is associated with Xco at its March 31, 2000 year-end and to a different corporation (Zco) at its December 31, 2000 year-end, the requirements of paragraph 125(5)(a) of the Act would not be met for the calendar year 2000. As a result, Yco may be allocated all of the $200,000 business limit not allocated to Zco for the December 31, 2000 taxation year, subject to proration for the short taxation year pursuant to paragraph 125(5)(b) of the Act.

We trust the above comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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