Principal Issues: a) Whether proposed amendment to ss 125(5.1) should be taken into account when calculating business limit reduction for taxation years starting after XXXXXXXXXX . b) Whether calculation of business limit is correct in the particular situation.
Position: a) Yes. b) Yes.
Reasons: a) Previous positions. b) Question of fact.
XXXXXXXXXX
Jelena Pajkovic(613) 941-0782
2011-042463 November 24, 2011
Subject: Business Limit for Large Corporations and the election of subsection 256(2)
Dear Sir,
This is in response to your request regarding the above subject in the situation briefly described below (the "Particular Situation").
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation
Corporation A ("Aco") is associated with Corporation C ("Cco"). Corporation B ("Bco") is associated with Cco. Aco and Bco would not be associated with each other in the absence of subsection 256(2). Aco, Bco and Cco are Canadian-controlled private corporations with December 31, 2010 fiscal period ends.
Cco annually makes the election under subsection 256(2) not to be associated with Aco and Bco.
The taxable capital employed in Canada of each of the corporations referred to in subsection 181.2(1) for the taxation year ended December 31, 2009 is as follows:
- Aco : $XXXXXXXXXX
- Bco : $XXXXXXXXXX
- Cco : $XXXXXXXXXX
You note that under the proposed amendment to subsection 125(5.1), item B of the business limit reduction formula is 0.225% x (D- $XXXXXXXXXX).
In your opinion, as a result of Cco's annual elections pursuant to subsection 256(2), Aco is not associated with any other corporation during its 2010 taxation year and its previous taxation year for the purposes of the application of subsection 125(5.1), and element D of the formula described in paragraph 125(5.1) in its case should equal XXXXXXXXXX. Its business limit for the 2010 tax year would therefore be $XXXXXXXXXX.
As Bco is not associated with any other corporation in its 2010 taxation year and its preceding taxation year for the purposes of subsection 125(5.1), element D of the formula described in that paragraph in its case should be $XXXXXXXXXX. Bco's business limit would therefore be $XXXXXXXXXX for its 2010 taxation year.
With respect to Cco, its business limit for the 2010 taxation year would be nil, given the election in subsection 256(2) that it made for that taxation year.
Your Questions
1. Given the proposed amendment to subsection 125(5.1), you wish to know whether the earlier interpretations on this subject are still valid, particularly the one issued on February 16, 2004 (2003-0051701I7). In that technical interpretation, we took the position that by making the election under subsection 256(2), corporations otherwise associated with each other, were not associated for purposes of the application of paragraph 125(5.1), but remained associated for the purposes of subsections 181.1(2) and (4) in view of the fact that the proposed amendment to subsection 125(5.1) did not apply to the taxation years in issue.
2. You also asked if it is necessary to consider this amendment to subsection 125(5.1) when preparing a corporation's tax return for a taxation year beginning after XXXXXXXXXX since that amendment has not yet received royal assent.
3. Finally, you asked if the business limits as calculated in the Particular Situation are correct in applying the proposed amendment to subsection 125(5.1). If not, you wish to know the correct calculations.
Our Comments
It appears to us that the Particular Situation could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. However, we are able to offer the following general comments that may be helpful to you.
It appears to us that the proposed amendment to subsection 125(5.1) does not affect the validity of the position taken in the situation set out in technical interpretation 2003-0051701I7.
With regard to your second question, the position of the Canada Revenue Agency is that, even if the proposed amendment to subsection 125(5.1) has not yet received royal assent, it must be taken into account in the calculation of the business limit of a corporation for any taxation year beginning after XXXXXXXXXX. In fact, Form T2 - Corporation Income Tax Return (as amended for the 2010 taxation year) reflects the proposed amendment to subsection 125(5.1).
Finally, it appears to us that your calculations of business limits in the Particular Situation are accurate.
We hope that our comments are of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch