Principal Issues: Can income resulting from an ITC refund in respect of SR&ED be eligible for the small business deduction where the corporation ceased carrying on business?
Position: It is possible depending on facts.
Reasons: Position in paragraph 9 of IT-73R6
XXXXXXXXXX 2011-042307 Charles Rafuse 613-247-9237 November 1, 2011
Dear XXXXXXXXXX :
Re: Small Business Deduction
This is in response to your correspondence of September 30, 2011, concerning a corporation's eligibility for a small business deduction ("SBD") under subsection 125(1) of the Income Tax Act (the "Act").
Briefly, you indicated that a corporation that was "Canadian-controlled private corporation" ("CCPC") as that term is defined in subsection 248(1) of the Act, carried on an active business in Canada. The corporation was also engaged in "scientific research and experimental development" ("SRED") as that term is defined in subsection 248(1) of the Act. The corporation sold all of its assets in 2010 and ceased carrying on business. The corporation received a refundable investment tax credit for its 2010 taxation year in respect of its SRED activities.
You have asked if the corporation's income for its 2011 taxation year that results from the amount included in its income pursuant to paragraph 12(1)(t) of the Act (as a result of the corporation receiving a refundable investment tax credit in 2010) would be eligible for the SBD.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office (the "TSO"). We are, however, prepared to make the general comments set out below, which may be of assistance.
In order for a corporation to be able to claim a SBD, or be able to claim an investment tax credit (or refundable investment tax credit) in respect of expenditures that are in respect of SRED, certain conditions set out in the Act must be satisfied. While a discussion of these conditions is beyond the scope of this response, please refer to Interpretation Bulletin IT-73R6, The Small Business Deduction, for additional information concerning the rules that are applicable for claiming a SBD. In the context of the type of situation described above, the comments in paragraph 9 of IT-73R6 may be of some assistance. That paragraph indicates that income related to a business that arises after cessation of that business cannot qualify as income from a business unless it arises from:
"(a) bad debt recoveries;
(b) the recapture of various reserves;
(c) the sale of the inventory of the business;
(d) the disposition of eligible capital property of the business and the income is the amount of the excess described in subsection 14(1);
(e) the recapture of capital cost allowance; or
(f) a similar item to those described in any of (a) to (e) above."
While it remains a question of fact as to whether the conditions for claiming a SBD have been met, it is our view that the amount of an investment tax credit (or refundable investment tax credit) that is included in a corporation's income under paragraph 12(1)(t) after the cessation of business would be a similar item to those described in paragraph 9 of IT-73R6. Accordingly, such an amount could be considered to be income from the same category of business as that to which the source originally related and could potentially qualify for the SBD.
We trust that these comments will be of assistance.
Yours truly
Michael Cooke
Acting Manager
For Director
Business and Partnership Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch