Principal Issues: Whether a corporation has the obligation to deduct an amount under paragraph 125(1).
Position: The wording used in paragraph 125(1) is "may be deducted". Therefore a corporation has no obligation to deduct an amount under paragraph 125(1).
Reasons: Wording of the Act.
XXXXXXXXXX 2016-064848
Sylvie Labarre, CPA, CA
June 20, 2016
Dear Sir,
Subject: Small Business Deduction
This is in response to your email of 13 May 2016 in which you requested our view on the wording of subsection 125(1) of the Income Tax Act (hereinafter the "Act").
Unless otherwise stated, all statutory references herein are references to the provisions of the Act.
You wish to know whether a corporation is required to deduct an amount under subsection 125(1). You indicated that the reason why the corporation would choose not to take the small business deduction to which it was entitled was to enable it to add an amount to its general rate income pool account ("GRIP "), as defined in subsection 89(1) so as to enable its shareholders to receive eligible dividends.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation, as the case may be. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
As you indicated in your email, the wording of the beginning of the preamble to subsection 125(1) reads:
“La société qui est tout au long d’une année d’imposition une société privée sous contrôle canadien peut déduire de son impôt payable par ailleurs pour l’année…” [Our emphasis]
Moreover, the English version of the wording of the beginning of the preamble reads:
“There may be deducted from the tax otherwise payable under this Part…” [Our emphasis]
Based on this text and especially that emphasized, we are of the view that a corporation has no obligation to deduct the small business deduction to which it is entitled.
Furthermore, when a company calculates its GRIP, it must calculate, among other things, its adjusted taxable income for the year. Indeed, one variable that is added in the calculation of GRIP is the corporation’s general rate factor for the particular taxation year multiplied by its adjusted taxable income for that taxation year.
"Adjusted taxable income" is defined in subsection 89(1). It is calculated using the formula (A-B-C). For a corporation that is not a deposit insurance corporation, variable A is the corporation’s taxable income for the taxation year. This amount is reduced by the two other variables, if any. Variable B is the amount determined by multiplying the amount, if any, deducted by the corporation under subsection 125(1) for the taxation year by the quotient obtained by dividing 100 by the rate of the deduction provided under that subsection for the taxation year. There also is a taxable income reduction provided by variable C that is not relevant for the purposes of this letter.
Thus, for purposes of determining the adjusted taxable income for the year as defined in subsection 89(1), it is the amount deducted under subsection 125(1) that will be used for the purpose of calculating variable B and not the amount deductible. If no amount was deducted under subsection 125(1), no taxable income reduction would occur because of variable B.
We trust our comments will be of assistance.
Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch