19 September 1996 Income Tax Severed Letter 9614875 - Interaction of investment tax credit with minimum tax

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.

PRINCIPAL ISSUES:

interaction of ITC with minimum tax -can ITC be applied as a reduction in the minimum amount, as a reduction in surtax. The issue relates to how 127(5)(b) is to be interpreted

POSITION:

can't reduce minimum amount payable under Part 1 but can reduce surtax. 127(5)(b) is a relieving provision which enables an individual to carry back ITC which could otherwise be deducted but without any benefit to the individual because of minimum tax

REASONS:

when an individual pays minimum tax, Part 1 tax is calculated under Division E.1 so that there is no tax credits applied other than 127.531 & 127.54(2). ITC can still be applied against surtax by reason of 180.1(1.2) and can be refunded by reason of 127.1(1) -such amounts of ITC are then deemed to be deducted under 127(5) by reason of 180.1(1.3) and 127.1(3). While T2038(IND) suggests otherwise, an amount of ITC calculated under 127(5)(b) is only deductible against surtax. The purpose of this paragraph is not to provide a deduction for ITC but to limit it so that the ITC which would otherwise be deductible can be carried back (see E53904).

961487 XXXXXXXXXX A. Humenuk

Attention: XXXXXXXXXX

September 19, 1996

Dear XXXXXXXXXX

Re:Interaction of the Investment Tax Credit and Minimum Tax

We are replying to your letter of April 25, 1996, concerning the application of the investment tax credit when an individual is subject to minimum tax.

We have summarized your questions and replied separately to each question as follows:

1. Why are various tax credits such as the federal political tax credit, investment tax credit, labour- sponsored funds tax credit not used in calculating minimum tax?

Response

The rationale and intent of the minimum tax legislation is explained in the Department of Finance publication entitled "A Minimum Tax for Canada" released in May 1985 (a copy of the relevant pages is attached). Minimum tax essentially involves a recalculation of an individual's income on the basis that certain tax deductions, exemptions and tax credits which would otherwise be available for regular tax purposes are not deductible or applicable. The only tax credits to be applied to reduce an individual's amount of minimum tax as required by section 127.5 of the Income Tax Act (the Act) are those set out in section 127.531 in determining the individual's "basic minimum tax credit" and the foreign tax credit as determined under subsection 127.54(2) of the Act. The "basic minimum tax credit" is comprised of the personal tax credit under subsection 118(1), the age tax credit under subsection 118(2), the charitable tax credit under section 118.1, the medical tax credit under section 118.2, the Canada Pension Plan and Unemployment Insurance tax credit under section 118.7 and the disability, tuition and education tax credits under subsection 118.3(1), sections 118.5 and 118.6 respectively. Tax credits transferred from a spouse or dependant are not included in the "basic minimum tax credit."

If the amount of tax payable as calculated under Division E.1 (the minimum tax calculation) is greater than the amount of tax payable under Division E (regular tax payable), the individual's tax payable under Part I for the year is determined under Division E.1 rather than Division E of the Act. Since certain credits described in Division E of the Act, such as the investment tax credit, cannot either directly or indirectly reduce tax payable under Division E.1 and since a taxpayer's Part I tax payable for the year cannot be less than that amount, any such credit to which the taxpayer might otherwise be entitled under Division E, may be of limited or no benefit to that taxpayer. If the credit cannot be used to reduce Part I tax because of the minimum tax rules and it cannot be applied to another taxation year, the benefit from the credit is lost.

Since the Child Tax Benefit, the Quebec Abatement, and GST Credit are direct payments to qualifying individuals as opposed to a reduction in the tax payable for a taxation year, they are not affected by the manner in which income tax payable is calculated. As well, since the Refundable Investment Tax Credit does not enter into the calculation of the amount of regular tax payable, the minimum tax calculation does not affect the amount of Refundable Investment Tax Credit which can be claimed.

2. How is our position, as set out in our response to question 1 above, reconciled with the wording of paragraph 127(5)(b) of the Act which appears to permit an individual to claim a certain portion of investment tax credit under subsection 127(5) of the Act even though the individual is subject to minimum tax?

Response

Subsection 127(5) limits the amount of the investment tax credit which may be applied to reduce "tax otherwise payable" under Part I of the Act for the year. Generally, a taxpayer's claim is limited to the amount of total investment tax credit available (including all applicable carryovers), as indicated in column 6 on form T2038(IND) "Investment Tax Credit (Individuals) 1994 and Subsequent Years."

A further limitation arises when the minimum tax rules apply. When an individual is required to pay minimum tax, the individual cannot apply an available investment tax credit to reduce Part I tax payable because no amount can be applied to reduce tax otherwise payable below the minimum amount which the individual is required to pay.

When the minimum tax rules in Division E.1 apply, paragraph 127(5)(b) limits the amount deductible under subsection 127(5) of the Act to:

- a taxpayer's "tax otherwise payable" under Part I as defined in subsection 117(1) of the Act (i.e. without reference to Division E.1)

- plus the surtax payable under Part I.1 (as explained below)

- less the taxpayer's "minimum amount" for the year as determined under section 127.5 of the Act.

As a result, the amount of investment tax credit deductible for a particular year cannot exceed the sum of the surtax payable before the application of any investment tax credit and the amount required to reduce tax payable under Part I of the Act to the threshold at which minimum tax becomes payable. This limitation is intended as a relieving provision. As stated in the 1988 Department of Finance technical notes, paragraph 127(5)(b) of the Act was added so that a taxpayer would be able to carry back any investment tax credit which could not be used because of the minimum tax rules.

3. Can an individual who is subject to minimum tax in a particular year apply investment tax credit to reduce the amount of federal individual surtax payable for that year? You expressed concern that the investment tax credit might not be available when minimum tax applies because of the lack of reference to paragraph 127(5)(b) in subsection 180.1(1.2) of the Act.

Response

The investment tax credit can be used to reduce the surtax even though an individual is subject to minimum tax. Since the individual surtax (Part 1.I) involves a separate calculation from the calculation of tax payable under Part I, the limitations on the application of the investment tax credit as described above have no application with respect to the surtax.

The authority to reduce the surtax by the amount of any available investment tax credit is found in subsection 180.1(1.2) of the Act. The calculation in subsection 180.1(1.2) determines the amount of available investment tax credit available for surtax purposes. The reference to the amount of investment tax credit deemed to be deducted by subsection 180.1(1.3) is contained in subsection 180.1(1.2) to prevent a circularity problem which would otherwise arise in determining the maximum amount of investment tax credit which can be applied to the surtax.

4. How is the area "Calculation of Allowable Claim" in section 1 of Part A of form T2038(IND), "Investment Tax Credit (Individuals) 1994 and Subsequent Years" to be completed in order to determine the maximum investment tax credit claim available? In particular, it is noted that an individual who is subject to minimum tax completes form T691 "Calculation of Minimum Tax" and enters the appropriate amount of income tax on line 417 of the T1 return so that any investment tax credit which is claimed will not be used in the calculation of income tax payable.

Response

As stated above, an individual cannot apply an available investment tax credit to reduce the amount of tax payable below the minimum amount as determined under Division E.1 by means of a claim for an investment tax credit. If the minimum amount as determined under section 127.51 is greater than the amount of "tax otherwise payable," then the amount shown at "y" in the "Calculation of Allowable Claim" area of T2038(IND) is the maximum amount which can be applied against the individual surtax. We have advised the area responsible for the development of form T2038(IND) to take the necessary steps to revise it.

We trust our comments will be of assistance to you.

Yours truly,

John F. Oulton for Director Business and Publications Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch

Enclosure