2 November 1999 Internal T.I. 9926207 - M&P

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 Department.

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

									November 8, 1999

	Calgary Tax Services Office	Partnerships Section
	Large Case Files Section	S. Tevlin
	Verification and Enforcement
	  Division

	Attention:  Bruce Meckleberg
		992620

We are writing in response to your memorandum dated September 27, 1999 wherein you requested our comments with respect to a particular audit situation.

Our understanding of the facts is as follows:

XXXXXXXXXX.

Issue:

Can XXXXXXXXXX include the interest income in its ADJUBI for purposes of the M&P calculation?

Taxpayer's Position

The taxpayer is of the opinion that the interest income is included in the ADJUBI of XXXXXXXXXX by virtue of the deeming provisions of paragraph 129(6)(b).

Calgary Tax Services Position

It is your opinion that paragraph 129(6)(b) deals with the small business deduction only and therefore excludes the interest income from the M&P deduction calculation.

Comments:

Section 5202 of the Income Tax Regulations defines ADJUBI for purposes of determining Canadian manufacturing and processing profits, and refers to income of the corporation for the year from an active business carried on in Canada. The definition of active business for these purposes is found in subsection 248(1) of the Act. That being, where a business carried on by a taxpayer is not a specified investment business or a personal service business it will be considered an active business. However, whether or not a particular activity constitutes "M&P" is a question of fact.

The definition of active business in subsection 125(7) of the Act is applicable only for purposes of section 125. Even though subsection 129(6) may deem certain income to be active business income for purposes of section 125 of the Act, this definition of active business income is not valid for purposes of section 125.1 of the Act, other than indirectly in the calculations in subsection 125.1(1) which cross-refer to amounts determined in section 125.

We wish to point out that IT-145R was published June 19, 1981, at which time the definition of active business for purposes of the M&P deduction was the same as the definition of active business for purposes of the small business deduction. The definition of active business in subsection 248(1) of the Act was amended applicable to the 1985 and subsequent taxation years.

We trust our comments will be of assistance to you.

Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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