Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02
Disclaimer
We do not guarantee the accuracy of this copy of the CRA website.
Scraped Page Content
Determining Whether a Financial Institution is a Qualifying Institution for Purposes of Section 141.02
GST/HST Technical Information Bulletin B-097
August 2011
NOTE: This version replaces the earlier version dated September 2007.
The information in this bulletin does not replace the law found in the Excise Tax Act (the Act) and its regulations. It is provided for your reference. As it may not completely address your particular operation, you may wish to refer to the Act or appropriate regulation, or contact a Canada Revenue Agency (CRA) GST/HST rulings office for more information. A ruling should be requested for certainty in respect of any particular GST/HST matter. Pamphlet RC4405, GST/HST Rulings – Experts in GST/HST Legislation explains how to obtain a ruling and lists the GST/HST rulings offices. If you wish to make a technical enquiry on the GST/HST by telephone, please call 1-800-959-8287.
Reference in this publication is made to supplies that are subject to the GST or the HST. The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia. The GST applies in the rest of Canada at the rate of 5%. If you are uncertain as to whether a supply is made in a participating province, you may refer to GST/HST Technical Information Bulletin B-103, Harmonized Sales Tax – Place of Supply Rules for Determining Whether a Supply is Made in a Province.
If you are located in Quebec and wish to make a technical enquiry or obtain a ruling related to the GST/HST, please contact Revenu Québec at 1-800-567-4692. You may also visit their Web site at www.revenu.gouv.qc.ca to obtain general information.
Note: Legislative references in this bulletin refer to the Excise Tax Act or proposed amendments to the Act unless otherwise specified.
Table of Contents
- Introduction
- Definition of qualifying institution
- Appendix A – Definition of financial institution
- Appendix B – Mergers, amalgamations and winding-up
Introduction
This bulletin explains the criteria for determining whether a financial institution is a qualifying institution for purposes of section 141.02, which provides specific input tax credit (ITC) allocation rules to be used by financial institutions [including both listed and de minimis financial institutions as described in subsection 149(1)] when calculating ITCs for the GST/HST paid on their inputs.
Section 141.02 includes some provisions that apply to financial institutions that are qualifying institutions (e.g., the application to use pre-approved methods); some provisions that apply to financial institutions that are not qualifying institutions (e.g., the election to use the prescribed percentage); and some provisions that may apply to all financial institutions (e.g., the allocation rules for excluded inputs).
If a financial institution is a qualifying institution, refer to GST/HST Technical Information Bulletin B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions.
If a financial institution is not a qualifying institution, refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions.
Definition of qualifying institution
A qualifying institution for a particular fiscal year is a person that meets the following three conditions:
- it is a "financial institution" of a "prescribed class" at any time in the particular fiscal year of the person; and
- it has two fiscal years immediately preceding the particular fiscal year and, for each of those two fiscal years:
- the "adjusted tax credit amount" of the person equals or exceeds the "prescribed amount" for that "prescribed class" for the particular fiscal year; and
- the "tax credit rate" of the person equals or exceeds the "prescribed percentage" for that "prescribed class" for the particular fiscal year.
Financial institution of a prescribed class
Paragraph (a) of the definition of qualifying institution requires that a person be a financial institution of a prescribed class throughout the particular fiscal year of the person. Subsection 141.02(3) provides that a person is a financial institution of a prescribed class for purposes of section 141.02 throughout a particular fiscal year if the person is a financial institution of that class at any time in the particular fiscal year.
Financial institution
A financial institution is a person that is a financial institution under section 149. A financial institution includes persons listed in paragraph 149(1)(a) such as banks, trust corporations or insurers, and persons described in paragraphs 149(1)(b) and (c) (referred to as de minimis financial institutions). See Appendix A of this bulletin for more information on what is a financial institution.
Prescribed classes
Section 2 of the Input Tax Credit Allocation Methods (GST/HST) Regulations (the Regulations) provides that the following are prescribed classes of financial institutions for purposes of the definition of qualifying institution:
- banks,
- insurers, and
- securities dealers.
Banks
Under subsection 123(1), the term "bank" means a bank or an authorized foreign bank within the meaning of section 2 of the Bank Act. Under section 1 of the Regulations, a bank does not include an insurer. If a person is a bank as defined in subsection 123(1) at any time in a fiscal year and falls within the definition of insurer in section 1 of the Regulations, then that person will be an insurer and not a bank throughout that fiscal year for purposes of the relevant subsections of section 141.02.
Insurers
Under subsection 123(1), the term "insurer" means a person who is licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business or under the laws of another jurisdiction to carry on in that other jurisdiction an insurance business. The definition of insurer in section 1 of the Regulations requires that the person carry on an insurance business as the person's principal business in Canada. As a result, a person such as a foreign bank that is authorized to carry on an insurance business in its home jurisdiction, but does not carry on an insurance business in Canada, will not be an insurer for purposes of the relevant subsections of section 141.02 although it might be an insurer as defined in subsection 123(1).
Securities dealers
For purposes of the relevant subsections of section 141.02, a securities dealer in respect of a fiscal year means a person who:
- is not a bank or an insurer (as these terms are defined in the Regulations and described above) at any time in the fiscal year;
- carries on at any time in the fiscal year a business as a trader or dealer in, or as a broker or salesperson of, securities as the person's principal business in Canada; and
- is registered under the laws of Canada or a province to carry on in Canada at any time in the fiscal year a business as a trader or dealer in, or as a broker or salesperson of, securities.
If a financial institution is not of a prescribed class at any time in a particular fiscal year, it does not meet the requirements of paragraph (a) of the definition of qualifying institution and is not a qualifying institution for that particular fiscal year. Refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for information on the rules that apply to financial institutions that are not qualifying institutions.
Example 1
Bank B is a bank within the meaning of section 2 of the Bank Act during its fiscal year ending October 31, 2010, and does not carry on an insurance business. As a result, Bank B is a financial institution of a prescribed class throughout its fiscal year ending October 31, 2010.
Example 2
Insurance Co. is licensed under the laws of Canada to carry on an insurance business in Canada. Insurance Co. carries on an insurance business as its principal business during its fiscal year ending December 31, 2011. As a result, Insurance Co. is a financial institution of a prescribed class throughout its fiscal year ending December 31, 2011.
Example 3
Insurance Seller is an insurance broker; it is not a bank or an authorized foreign bank within the meaning of section 2 of the Bank Act. Insurance Seller is not licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada an insurance business. Insurance Seller is not a trader or a dealer in, or a broker or salesperson of, securities because insurance policies are not securities. As a result, Insurance Seller is not a financial institution of a prescribed class.
Adjusted tax credit amount – equals or exceeds prescribed amount
Subparagraph (b)(i) of the definition of qualifying institution requires that, for each of the two fiscal years immediately preceding the fiscal year, the financial institution had an adjusted tax credit amount equal to or exceeding the prescribed amount for the prescribed class of financial institutions. As a result, if a financial institution (other than a new corporation formed as the result of a merger or amalgamation) did not exist for two years prior to the particular fiscal year, the financial institution would not be a qualifying institution for that particular fiscal year. Specific provisions apply to determine the tax credit amounts of a new corporation formed from two corporations that are merged or amalgamated and of a corporation that winds up another corporation. These specific provisions are set out in Appendix B to this bulletin.
The adjusted tax credit amount is computed by multiplying the tax credit amount of the person for the fiscal year by the fraction 365/number of days in the fiscal year.
Tax credit amount
The tax credit amount of a person for a fiscal year means:
- if the person has made an election under subsection 141.02(9) in respect of the fiscal year, the total of all amounts each of which is an ITC for the fiscal year in respect of a residual input tax amount (as explained below) of the person for the fiscal year that the person would, in the absence of that subsection, be entitled to claim for GST/HST purposes;
- if the person is a qualifying institution for the fiscal year, has not made an election under subsection 141.02(7) or (27) in respect of the fiscal year and has not received an authorization from the Minister to use for the fiscal year the particular methods set out in an application made under subsection 141.02(18), the total of all amounts each of which is an ITC for the fiscal year in respect of a residual input tax amount of the person for the fiscal year that the person would, if the person were not a qualifying institution for the fiscal year and did not make an election under subsection 141.02(9) in respect of the fiscal year, be entitled to claim for GST/HST purposes; and
- in any other case, the total of all amounts each of which is an ITC for the fiscal year in respect of a residual input tax amount of the person for the fiscal year that the person is entitled to claim for GST/HST purposes.
Paragraphs (a) and (b) of the definition of tax credit amount would generally apply when a financial institution was determining its ITC entitlement for residual inputs using the prescribed percentage. Where these paragraphs apply, a financial institution's tax credit amount is the amount that would be a tax credit amount of the financial institution if it was required to determine its ITC entitlement in respect of residual input tax amounts for that year using the provisions of subsections 141.02(10) to (13), (16) and (17). These provisions are explained in GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act.
Paragraph (c) of the definition of tax credit amount applies in cases where paragraphs (a) and (b) do not apply. Paragraph (c) provides that the person's tax credit amount for the fiscal year is the total of all amounts each of which is an ITC in respect of a residual input tax amount that the person would have been entitled to claim in the fiscal year. This would apply to a financial institution that is not a qualifying institution that used subsections 141.02(10) to (13), subsection 141.02(32) or subsection 141.02(21) (if it is a designated qualifying institution) to determine its ITCs, or to a qualifying institution that has made an election under subsection 141.02(7) or (27) or has been authorized to use particular methods under subsection 141.02(21).
A residual input tax amount of a person for a fiscal year means:
- if the person is a selected listed financial institution at any time in the fiscal year, an amount of tax under any of subsection 165(1) and sections 212, 218 and 218.01 in respect of a supply or importation of a residual input (as explained below) that became payable by the person during the fiscal year without having been paid before the fiscal year or was paid by the person during the fiscal year without having become payable (these provisions do not include the provincial part of the HST); and
- in any other case, an amount of tax in respect of a supply, importation or bringing into a participating province of a residual input that became payable by the person during the fiscal year without having been paid before the fiscal year or was paid by the person during the fiscal year without having become payable.
A residual input is a direct input or a non-attributable input. As a result, a residual input is property or a service that is acquired, imported or brought into a participating province, or consumed or used, both for the purpose of making taxable supplies for consideration and for other purposes, and which is neither capital personal property nor capital real property (nor improvements to these capital properties).
Prescribed amounts for prescribed classes
Section 3 of the Regulations prescribes the following amounts for purposes of the definition of qualifying institution:
| Prescribed class | Prescribed amount |
|---|---|
| Bank | $500,000 |
| Insurer | $500,000 |
| Securities dealer | $500,000 |
If a financial institution does not have an adjusted tax credit amount equal to or exceeding the prescribed amount for the prescribed class of financial institutions of the person for each of the two fiscal years immediately preceding the fiscal year for which qualifying institution status is being determined, the financial institution does not meet the conditions in subparagraph (b)(i) of the definition of qualifying institution, and is not a qualifying institution. Refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for information on the rules that apply to financial institutions that are not qualifying institutions.
Example 4
Bank D is a bank for purposes of the definition of qualifying institution and has always had a fiscal year of November 1 to October 31. To determine whether it is a qualifying institution in its fiscal year ending October 31, 2012, Bank D must calculate its tax credit amount for its fiscal years ending October 31, 2010 and October 31, 2011. Bank D was a qualifying institution and used pre-approved methods to calculate its operative extent and procurative extent on residual inputs for its fiscal years ending October 31, 2010 and October 31, 2011. Bank D was eligible to claim ITCs on its residual inputs as shown below.
| Year ending October 31, 2010 | Year ending October 31, 2011 | |
|---|---|---|
| ITCs – direct-inputs | $1,085,000 | $1,090,000 |
| ITCs – non-attributable inputs | $20,000 | $5,000 |
| Tax credit amount | $1,105,000 | $1,095,000 |
| Adjusted tax credit amount (tax credit amount × 365/365) | $1,105,000 | $1,095,000 |
As its adjusted tax credit amount for each of these years is greater than $500,000, Bank D meets the conditions of subparagraph (b)(i) of the definition of qualifying institution for the fiscal year ending October 31, 2012.
Example 5
Insurer C is an insurer for purposes of the definition of qualifying institution and has always had a fiscal year of January 1 to December 31. To determine whether it is a qualifying institution for the fiscal year ending December 31, 2011, Insurer C must calculate its tax credit amount for its fiscal years ending December 31, 2009 and December 31, 2010. Insurer C was not a qualifying institution and calculated the ITCs that it was entitled to claim in respect of residual inputs using the methods in subsections 141.02(10) to (13) for its fiscal years ending December 31, 2009 and December 31, 2010. Either a direct attribution method or a specified method applied to each of Insurer C's residual inputs and Insurer C was eligible to claim ITCs on its residual inputs as shown below:
| Year ending December 31, 2009 | Year ending December 31, 2010 | |
|---|---|---|
| ITCs – direct inputs | $214,050 | $194,200 |
| ITCs – non-attributable inputs | $950 | $800 |
| Tax credit amount | $215,000 | $195,000 |
| Adjusted tax credit amount (tax credit amount × 365/365) | $215,000 | $195,000 |
As its adjusted tax credit amount for at least one of these years is less than $500,000, Insurer C is not a qualifying institution for the fiscal year ending December 31, 2011 because it does not meet the conditions of subparagraph (b)(i) of the definition of qualifying institution.
Tax credit rate – equals or exceeds prescribed percentage
Subparagraph (b)(ii) of the definition of qualifying institution requires that, for each of the two fiscal years immediately preceding the particular fiscal year, the financial institution have a tax credit rate equal to or exceeding the prescribed percentage for the prescribed class of financial institutions of the person. Specific provisions apply to determine the tax credit amount of a new corporation formed from two corporations that are merged or amalgamated and of a corporation that winds up another corporation. These specific provisions are set out in Appendix B to this bulletin.
Tax credit rate
A financial institution's tax credit rate is determined according to the following formula:
Tax credit rate = A / B
where
A = the tax credit amount of the person for the fiscal year (determined as described above); and
B = its total tax amount for the fiscal year.
The total tax amount of a person for a fiscal year is the total of all amounts each of which is a residual input tax amount of the person for the fiscal year.
Prescribed percentages for prescribed classes
Section 4 of the Regulations prescribes the following percentages for purposes of the definition of qualifying institution:
| Prescribed class | Prescribed percentage |
|---|---|
| Bank | 12% |
| Insurer | 10% |
| Securities dealer | 15% |
If a financial institution does not have a tax credit rate equal to or exceeding the prescribed percentage for the prescribed class of financial institutions of the person for each of the two fiscal years immediately preceding the particular fiscal year, the financial institution does not meet the conditions in subparagraph (b)(ii) of the definition of qualifying institution, and is not a qualifying institution. Refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions, for information on the rules that apply to financial institutions that are not qualifying institutions.
Example 6
Bank D is a bank for purposes of the definition of qualifying institution and has always had a fiscal year of November 1 to October 31. To determine whether it is a qualifying institution in its fiscal year ending October 31, 2012, Bank D must calculate its tax credit rate for its fiscal years ending October 31, 2010 and October 31, 2011. Bank D was a qualifying institution and used pre-approved methods to calculate its operative extent and procurative extent on residual inputs for its fiscal years ending October 31, 2010 and October 31, 2011. The total amount of tax payable or paid without having become payable during the two fiscal years immediately preceding the fiscal year ending October 31, 2012 is:
| Year ending | Tax credit amount (A) | Total tax amount (B) | Tax credit rate (A/B) |
|---|---|---|---|
| October 31, 2010 | $1,105,000 | $7,950,000 | 13.9% |
| October 31, 2011 | $1,095,000 | $8,050,000 | 13.6% |
As its tax credit rate for each of these years is greater than 12% (the prescribed percentage for banks), Bank D meets the conditions of subparagraph (b)(ii) of the definition of qualifying institution for its fiscal year ending October 31, 2012.
Bank D meets the conditions in paragraph (a) of the definition of qualifying institution in its fiscal year ending October 31, 2012, because it is a bank for purposes of the definition of qualifying institution. Bank D also meets the conditions of subparagraph (b)(i) of the definition of qualifying institution in the fiscal year ending October 31, 2012, because its tax credit amount for each of the previous two fiscal years is greater than $500,000. As a result, Bank D meets all of the conditions of paragraph (a) and subparagraphs (b)(i) and (b)(ii) of the definition of qualifying institution, and therefore is a qualifying institution for its fiscal year ending October 31, 2012.
Summary of prescribed classes, amounts and percentages
The following is a summary of the prescribed amount and prescribed percentage applicable to each of the prescribed classes of financial institutions:
| Prescribed class | Prescribed amount | Prescribed percentage |
|---|---|---|
| Bank | $500,000 | 12% |
| Insurer | $500,000 | 10% |
| Securities dealer | $500,000 | 15% |
If a financial institution of a prescribed class has an adjusted tax credit amount for each of the two fiscal years immediately preceding the particular fiscal year of $500,000 or more, and a tax credit rate for each of the two fiscal years immediately preceding the particular fiscal year that equals or exceeds the prescribed percentage for the prescribed class of financial institutions, the financial institution is a qualifying institution.
If a financial institution is a qualifying institution, refer to GST/HST Technical Information Bulletin B-098, Application of Section 141.02 to Financial Institutions That Are Qualifying Institutions. If a financial institution is not a qualifying institution, refer to GST/HST Technical Information Bulletin B-099, Application of Section 141.02 to Financial Institutions That Are Not Qualifying Institutions. For additional information regarding input tax credit allocation for financial institutions, refer to GST/HST Technical Information Bulletin B-106, Input Tax Credit Allocation Methods for Financial Institutions for Purposes of Section 141.02 of the Excise Tax Act.
Appendix A – Definition of financial institution
A financial institution includes:
- a listed financial institution under paragraph 149(1)(a); and
- a person described in paragraphs 149(1)(b) and (c) (referred to as a de minimis financial institution).
A person may also be a financial institution for a limited period as a result of a merger or amalgamation or a purchase of a business. More specifically:
- a corporation (amalco) formed as a result of a merger or amalgamation will be a financial institution throughout its first taxation year where amalco's principal business is the same as or similar to the business of one or more of the predecessors that immediately before the time of the merger or amalgamation was a financial institution; and
- a person (acquireco) who, at any time in its taxation year, acquires a business as a going concern from a person who was immediately before that time a financial institution and, immediately after that time, acquireco's principal business is the business so acquired, is a financial institution for the remainder of its taxation year.
Listed financial institutions
Generally, listed financial institutions are traditional providers of financial services. A person is a listed financial institution throughout its particular taxation year if, at any time in the particular year, the person is included in any one of the categories in subparagraphs 149(1)(a)(i) through (xi).
Examples of listed financial institutions are:
- a bank,
- a corporation that is licensed or otherwise authorized under provincial law to carry on in Canada the business of offering to the public its services as a trustee,
- a person whose principal business is as a trader or dealer in, or as a broker or salesperson of, financial instruments or money such as an investment broker,
- a credit union,
- an insurer,
- a segregated fund of an insurer,
- the Canada Deposit Insurance Corporation,
- a person whose principal business is the lending of money or the purchasing of debt securities, or a combination thereof,
- an investment plan,
- a tax discounter, and
- a corporation that has made an election under section 150.
More information on listed financial institutions is available in GST/HST Memorandum 17.6, Definition of "Listed Financial Institution".
De minimis financial institutions
A de minimis financial institution is generally a person who earns a significant amount of income from investments or separate fees for financial services. A person is a de minimis financial institution as a result of meeting one of two threshold tests.
Under the first test in paragraph 149(1)(b), a person is generally a financial institution throughout a particular taxation year if the person's "financial revenue" in the preceding taxation year exceeded 10% of its total revenues (other than from sales of capital property) in that year and exceeded $10 million. The term "financial revenue" generally includes interest, dividends and separate fees or charges for financial services that are included in computing the person's income for purposes of the Income Tax Act, but excludes the following:
- interest or dividends from a related corporation;
- dividends in kind or a patronage dividends; and
- separate fees for zero-rated supplies of precious metals.
For example, a holding company may be considered a financial institution under paragraph 149(1)(b) if it earns financial revenues such as dividends from an unrelated corporation for the previous taxation year to the extent that it meets the thresholds mentioned above.
When a person is not a financial institution under the first test, the person may be a financial institution under the second test in paragraph 149(1)(c). Under this second test, a person is generally a financial institution throughout a particular taxation year if the person's income for purposes of the Income Tax Act from interest or separate fees or charges related to credit cards issued by the person, or related to loans, advances or credit granted by the person, exceeded $1 million in its preceding taxation year. For the purpose of this de minimis test, penalties levied by a vendor for late payment of an account receivable generated in the normal course of the vendor's business would not be considered to be a fee for the provision of credit. In addition, interest from a related corporation is not included in this total.
For example, a department store that issues credit cards to its customers and that receives interest related to these credit cards would be a financial institution under paragraph 149(1)(c) if the income it earns from the interest exceeded $1 million in its preceding taxation year.
Paragraphs 149(1)(b) and (c) do not apply for purposes of determining if a person is a financial institution throughout a particular taxation year where the person is:
- at the beginning of the particular year,
- a charity, municipality, school authority, hospital authority, public college or university; or
- a non-profit organization that operated, otherwise than for profit, a health care facility within the meaning of paragraph (c) of the definition of that expression in section 1 of Part II of Schedule V; or
- on the last day of the taxation year of the person preceding the particular year, a qualifying non-profit organization [within the meaning of subsection 259(2)].
Selected listed financial institutions
A selected listed financial institution, in general terms, is a listed financial institution described in any of subparagraphs 149(1)(a)(i) to (x) that has a permanent establishment in a participating province and a permanent establishment in any other province, at any time during the taxation year. It is proposed under the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations (SLFI Regulations) that were announced by the Department of Finance on January 28, 2011 that what constitutes a permanent establishment for the purpose of proposed section 225.2 and the draft SLFI Regulations be expanded. For additional information refer to Guide RC4050, GST/HST Information for Selected Listed Financial Institutions.
Appendix B – Mergers, amalgamations and winding-up
Subsections 141.02(4) and (5) apply for fiscal years that begin after March 31, 2007 for the purpose of determining the tax credit amount and the tax credit rate of a corporation that is formed by the merger or amalgamation of two or more predecessor corporations, or a corporation (the parent corporation) that has wound up another corporation where the parent corporation had owned 90% or more of the issued shares of each class of the capital stock of the other corporation. These rules apply despite any deeming rules in sections 271 and 272.
Mergers and amalgamations
Subsection 141.02(4) applies for the purpose of determining the tax credit amount and the tax credit rate of a corporation that is formed when two or more corporations (the predecessor corporations) are merged or amalgamated to form one corporation (the new corporation), otherwise than as the result of the acquisition of property of one corporation by another corporation pursuant to the purchase of the property by the other corporation or as a result of the distribution of the property to the other corporation on the winding-up of the corporation. For example, these provisions assist in determining whether the new corporation may be a qualifying institution or may be eligible to make an election under subsection 141.02(9) in a year subsequent to a merger or amalgamation. These rules apply despite any deeming rules in section 271. However, these provisions apply only for the purpose of determining the tax credit amount and the tax credit rate of the new corporation and do not affect the ITC entitlement of any of the corporations in respect of any period prior to the merger or amalgamation.
For the purpose of determining the tax credit amount and the tax credit rate of the new corporation for a fiscal year of the new corporation, the new corporation is deemed to have had two fiscal years, each of 365 days, immediately preceding the first fiscal year of the new corporation (i.e., the fiscal year of the new corporation that begins on the day of the merger or amalgamation).
Tax credit amount
The tax credit amount of the new corporation for the fiscal year immediately preceding the first fiscal year of the new corporation (the prior year of the new corporation) is deemed to be equal to the total of all amounts each of which is the adjusted tax credit amount of a predecessor corporation for prior year of the predecessor corporation. The prior year of a predecessor corporation is the last fiscal year, if any, of the predecessor corporation ending before the time of the merger or amalgamation otherwise than as a result of the merger or amalgamation (i.e., that is not the "stub" fiscal year of the predecessor corporation that is a result of the merger or amalgamation). The prior year is generally the last 365-day year ending before the merger.
Similarly, the tax credit amount of the new corporation for the fiscal year of the new corporation immediately preceding the prior year of the new corporation (the second prior year of the new corporation) is deemed to be equal to the total of all amounts each of which is the adjusted tax credit amount of a predecessor corporation for the fiscal year, if any, of the predecessor immediately preceding the prior year of the predecessor (the second prior year of the predecessor).
Example 1
Insurance Company D and Insurance Company F amalgamate on April 1, 2011 to form Insurance Company DF, which is an insurer for purposes of the definition of qualifying institution. Insurance Company D had a fiscal year from January 1 to December 31 and Insurance Company F had a fiscal year from January 1 to December 31. For the purpose of determining whether it is a qualifying institution for its fiscal year beginning April 1, 2011, Insurance Company DF must calculate its tax credit amount for both its prior year and its second prior year.
| Year ending December 31, 2010 | Year ending December 31, 2009 | |
|---|---|---|
| Insurance Company D – adjusted tax credit amount | $752,000 | $788,000 |
| Insurance Company F – adjusted tax credit amount | $253,000 | $230,000 |
| Total | $1,005,000 | $1,018,000 |
| Prior year | Second prior year | |
|---|---|---|
| Insurance Company DF's tax credit amount (total of adjusted tax credit amounts of the predecessor corporations) |
$1,005,000 | $1,018,000 |
| Insurance Company DF's adjusted tax credit amount (tax credit amount × 365/365) |
$1,005,000 | $1,018,000 |
For purposes of determining whether it is a qualifying institution for its fiscal year beginning April 1, 2011, Insurance Company DF's adjusted tax credit amount for its prior year is $1,005,000 and for its second prior year is $1,018,000.
Tax credit rate
Specific rules apply to determine the tax credit rate for the prior year of the new corporation and for the second prior year of the new corporation.
The tax credit rate of a person for a fiscal year of a person means the quotient, expressed as a percentage, determined by dividing the tax credit amount of the person for the fiscal year by the total tax amount of the person for the fiscal year.
Tax credit rate = A / B
For the new corporation:
A = the tax credit amount determined as described above; and
B = the total tax amount for the prior year or the second prior year of the new corporation, as the case may be, determined as described below.
The total tax amount of the new corporation for the prior year of the new corporation is deemed to be the total of all amounts, each of which is the adjusted total tax amount of a predecessor for the prior year of the predecessor, if any. The total tax amount of the new corporation for the second prior year of the new corporation is deemed to be the total of all amounts, each of which is the adjusted total tax amount of a predecessor for the second prior year of the predecessor, if any.
Example 2
Insurance Company D and Insurance Company F amalgamate on April 1, 2011 to form Insurance Company DF, which is an insurer for purposes of the definition of qualifying institution. Insurance Company D had a fiscal year from January 1 to December 31 and Insurance Company F had a fiscal year from January 1 to December 31. Insurance Company DF must calculate its tax credit rate for its prior year and its second prior year for its fiscal year ending March 31, 2012.
Prior year:
| Insurance Company DF | Insurance Company D | Insurance Company F |
|---|---|---|
| Tax credit amount prior year (A) |
Adjusted total tax amounts years ending December 31, 2010 (B) |
|
| $1,005,000 | $7,150,000 | $2,585,000 |
Insurance Company DF tax credit rate = A / B = $1,005,000/($7,150,000 + $2,585,000) = $1,005,000/$9,735,000 = 10.3%
Second prior year
| Insurance Company DF | Insurance Company D | Insurance Company F |
|---|---|---|
| Tax credit amount second prior year (A) |
Adjusted total tax amounts years ending December 31, 2009 (B) |
|
| $1,018,000 | $7,750,000 | $2,400,000 |
Insurance Company DF tax credit rate = A / B = $1,018,000/($7,750,000 + $2,400,000) = $1,018,000/$10,150,000 = 10%
Winding-up
Subsection 141.02(5) applies for the purpose of determining the tax credit amount and the tax credit rate of a corporation (the parent corporation) that has wound up another corporation (the subsidiary corporation) where the parent corporation had owned 90% or more of the issued shares of each class of the capital stock of the subsidiary corporation.
These provisions assist in determining whether the parent corporation may, in a subsequent year, be a qualifying institution or be eligible to make an election under subsection 141.02(9). These rules apply despite any deeming rules in section 272. However, these provisions apply only for the purpose of determining the tax credit amount and the tax credit rate of the parent corporation, and the subsection in no way affects the ITC entitlement of either the parent or the subsidiary in respect of any period prior to the wind-up.
Tax credit amount
Specific rules apply to determine the tax credit amount for the specified year of the parent corporation (i.e., the fiscal year of the parent corporation that includes the day on which the subsidiary corporation is wound up) and the prior year of the parent corporation (i.e., the fiscal year of the parent corporation immediately preceding the specified year of the parent corporation).
Specified year of the parent corporation
The tax credit amount of the parent corporation for the specified year of the parent corporation is determined according to the following formula:
Parent Corporation tax credit amount = TParent + TSubsidiary
where
TParent = the amount that would, in the absence of subsection 141.02(5), be the adjusted tax credit amount of the parent corporation for the specified year of the parent corporation; and
TSubsidiary = the amount that is the adjusted tax credit amount of the subsidiary corporation for the prior year of the subsidiary corporation (i.e., the last fiscal year, if any, of the subsidiary corporation ending before the day on which the subsidiary corporation is wound up that is not the "stub" financial year that ended on the winding up).
Example 3
Parent Corporation is a securities dealer for purposes of the definition of qualifying institution and owned 100% of all of the issued shares of each class of the capital stock of Subsidiary Corporation (also a securities dealer under section 141.02). Parent Corporation has a fiscal year of January 1 to December 31 and Subsidiary Corporation also had a fiscal year of January 1 to December 31. On July 1, 2010, Parent Corporation wound up Subsidiary Corporation.
| TParent – (year ending December 31, 2010) | $356,000 |
| TSubsidiary – (year ending December 31, 2009) | $379,000 |
| Parent Corporation – tax credit amount (year ending December 31, 2010) | $735,000 |
Prior year of the parent corporation
The tax credit amount of the parent corporation for the prior year of the parent corporation (i.e., the fiscal year, if any, of the parent corporation immediately preceding the specified year of the parent corporation) is determined according to the following formula:
Parent Corporation tax credit amount = TParent + TSubsidiary
where
TParent = the amount that would, in the absence of subsection 141.02(5), be the adjusted tax credit amount of the parent corporation for the prior year of the parent corporation;
TSubsidiary = the amount that is the adjusted tax credit amount of the subsidiary corporation for the second prior year of the subsidiary corporation (i.e., the fiscal year, if any, of the subsidiary corporation immediately preceding the prior year of the subsidiary corporation).
Example 4
Parent Corporation is a securities dealer for purposes of the definition of qualifying institution and owned 100% of all of the issued shares of each class of the capital stock of Subsidiary Corporation that was a securities dealer under section 141.02. Parent Corporation has a fiscal year of January 1 to December 31 and Subsidiary Corporation also had a fiscal year of January 1 to December 31. On July 1, 2010, Parent Corporation wound up Subsidiary Corporation.
| TParent – (year ending December 31, 2009) | $294,000 |
| TSubsidiary – (year ending December 31, 2008) | $368,000 |
| Parent Corporation – tax credit amount (year ending December 31, 2009) | $662,000 |
Tax credit rate
Specific rules apply to determine the tax credit rate for the specified year of the parent corporation and the prior year of the parent corporation.
Specified year of the parent corporation
The tax credit rate for the specified year of the parent corporation is determined according to the following formula:
Parent corporation tax credit rate = A / (B + C)
where
A = the tax credit amount of the parent corporation for the specified year of the parent corporation (determined as described above);
B = the amount that would, in the absence of subsection 141.02(5) be the adjusted total tax amount of the parent corporation for the specified year of the parent corporation; and
C = the amount that is the adjusted total tax amount of the subsidiary corporation for the prior year of the subsidiary corporation, if any.
Example 5
Parent Corporation is a securities dealer for purposes of the definition of qualifying institution and owned 100% of all of the issued shares of each class of the capital stock of Subsidiary Corporation that was a securities dealer under section 141.02. Parent Corporation has a fiscal year of January 1 to December 31 and Subsidiary Corporation also had a fiscal year of January 1 to December 31. On July 1, 2010, Parent Corporation wound up Subsidiary Corporation.
| Parent Corporation Tax credit amount (A) (year ending December 31, 2010) |
Parent Corporation Adjusted total tax amount (B) (year ending December 31, 2010) |
Subsidiary Corporation Adjusted total tax amount (C) (year ending December 31, 2009) |
| $735,000 | $2,253,000 | $2,603,000 |
Parent Corporation tax credit rate = A / (B + C) = $735,000 / ($2,253,000 + $2,603,000) = 15.1%
Prior year of the parent corporation
The tax credit rate of the parent for the prior year of the parent is determined according to the following formula:
Parent corporation tax credit rate = A / (B + C)
where
A = tax credit amount of the parent corporation for the prior year of the parent corporation (determined as described above);
B = the amount that would, in the absence of subsection 141.02(5), be the adjusted total tax amount of the parent corporation for the prior year of the parent corporation; and
C = the amount that is the adjusted total tax amount of the subsidiary corporation for the second prior year of the subsidiary corporation, if any.
Example 6
Parent Company is a securities dealer for purposes of the definition of qualifying institution and owned 100% of all of the issued shares of each class of the capital stock of Subsidiary Company that was a securities dealer under section 141.02. Parent Company has a fiscal year of January 1 to December 31 and Subsidiary Company also had a fiscal year of January 1 to December 31. On July 1, 2010, Parent Company wound up Subsidiary Company.
| Parent Corporation Tax credit amount (A) (year ending December 31, 2009) |
Parent Corporation Adjusted total tax amount (B) (year ending December 31, 2009) |
Subsidiary Corporation Adjusted total tax amount (C) (year ending December 31, 2008) |
| $662,000 | $1,874,000 | $2,566,000 |
Parent Corporation tax credit rate = A / (B + C) = $662,000 / ($1,874,000 + $2,566,000) = 14.9%
Enquiries by telephone
Technical enquiries on the GST/HST: 1-800-959-8287
General enquiries on the GST/HST: 1-800-959-5525 (Business Enquiries)
If you are located in Quebec: 1-800-567-4692 (Revenu Québec)
All technical publications related to the GST/HST are available on the CRA Web site at www.cra.gc.ca/gsthsttech.
- Date modified:
- 2011-08-26