Principal Issues: A corporation is entitled to the Part XII.4 tax credit provided for in section 127.41. Whether the corporation is taxable on the credit amount pursuant to paragraph 12(1)(x).
Position: No.
Reasons: In our view, paragraph 12(1)(x) does not apply to include in the income of the corporation the Part XII.4 credit provided for in section 127.41. The Part XII.4 credit is not an inducement. Furthermore, as the Part XII.4 tax is with respect to an outlay made by another taxpayer (the trust), subparagraph 12(1)(x)(iv) would not apply to include in the corporation's income the amount of that credit. This interpretation appears to be in line with the legislator's intent, as indicated in the Technical Notes of the Department of Finance with respect to section 127.41.
XXXXXXXXXX 2010-036476
Sylvie Labarre, CA
May 19, 2010
Dear Madam,
Subject: Tax treatment of the Part XII.4 tax credit
This is in response to your letter of April 19, 2010, in which you requested our opinion regarding the potential application of paragraph 12(1)(x) of the Income Tax Act (the "Act") in the following situation.
Unless otherwise indicated, any statutory reference is to a provision of the Income Tax Act.
Corporation A has a sanitary landfill site. Under section 56 of the Environment Quality Act (Quebec), Corporation A must pay an amount annually to an environmental trust to establish a fund for the post-closure management of the sanitary landfill site.
The trust qualifies as a "qualifying environmental trust" as defined in subsection 248(1). With the funds received from Corporation A, the trust generates investment income that is taxable under Part XII.4.
Since Corporation A is a beneficiary of the trust, it is subject to tax on the income generated by the trust pursuant to paragraph 107.3(1)(a). To avoid double taxation, Corporation A may claim a tax credit equal to the Part XII.4 tax payable by the trust under section 127.41.
You wish to know if the tax credit claimed by Corporation A is taxable to it by virtue of paragraph 12(1)(x), considering that the purpose of the credit is to avoid double taxation.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency ("CRA") not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments which may be helpful to you. These comments, however, may not apply to your particular situation in certain circumstances.
For the purposes of this discussion, we have assumed that Corporation A is the sole beneficiary of the qualifying environmental trust.
In such a case, the Part XII.4 tax credit pursuant to subsection 127.41(1) would be equal to the tax payable under Part XII.4 by the qualifying environmental trust for a taxation year that ends in the particular year. Under subsection 127.41(2), the tax credit will reduce Corporation A's Part I tax otherwise payable. If the tax credit is greater than the Part I tax otherwise payable, the excess of the credit over the Part I tax of Corporation A will be deemed by subsection 127.41(3) to have been paid on account of Part I tax payable and will, therefore, be refundable.
For the purpose of determining whether paragraph 12(1)(x) applies, it is our position that the Part XII.4 tax credit is an amount received by Corporation A in respect of Part XII.4 tax paid by the qualifying environmental trust. This credit is based on Part XII.4 tax. In addition, since the credit is refundable, it is not limited to the amount of Part I tax. We are of the view that if the credit were granted in respect of Corporation A's Part I tax, it would have been calculated based on that corporation's Part I tax and would be limited to that amount.
The credit is an amount received by Corporation A from a government.
However, it is our view that subparagraph 12(1)(x)(iii) does not apply because it is not an inducement payment. It was not given as an inducement to the taxpayer or the trust to undertake certain activities.
The Tax Court of Canada found in Hudson Bay Mining and Smelting Co. Limited v. The Queen, 2003 DTC 173, that paragraph 12(1)(x) was not applicable to the amount received by the taxpayer because the taxpayer was not the one who made or incurred the expenditure ("it made no outlay and incurred no expense, having acted only as IRC's agent."). In light of this decision, it is our view that subparagraph 12(1)(x)(iv) does not apply because it was the trust that incurred or made the Part XII.4 tax expenditure in respect of which the credit was received, not Corporation A. According to this Tax Court of Canada decision, subparagraph 12(1)(x)(iv) would apply to a reimbursement, contribution, allowance or assistance in respect of an expenditure made or incurred by the recipient of the amount.
This interpretation of paragraph 12(1)(x) in respect of the Part XII.4 tax credit appears to be consistent with Parliament's intention as expressed in the Department of Finance Explanatory Notes [for s. 127.41(1)]. According to those notes, "[t]he refundable tax credit avoids the double taxation of the same income in the hands of a mining reclamation trust and its beneficiaries. (Note that this refundable tax credit need not be included in computing the recipient’s income under paragraph 12(1)(x) or taken into account under any other provision of the Act)."
These comments are not advance income tax rulings and are not binding on the CRA in respect of any particular situation.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.