24 January 2011 Internal T.I. 2010-0390111I7 F - GRIP Computation and Taxable Income for M&P Credit
Principal Issues: For the purpose of computing a corporation's (Société C) GRIP balance at the end of 2006, where Société C computed its GRIP Addition for 2006 related to 2003 to be $ XXXXXXXXXX (63% x ($ XXXXXXXXXX - $ XXXXXXXXXX )) and realized a business loss of $ XXXXXXXXXX in 2006, which was carried back to 2003, whether Société C's income of $ XXXXXXXXXX for purposes of the M&P credit, under subsection 125.1(1), in 2003, should be taken into account in computing subsection 89(1)?
Position: No
Reasons: The law.
NOTE: View original document in Word.
January 24, 2011
XXXXXXXXXX Marc LeBlond
Technical advisor
XXXXXXXXXX Tax Services Office
XXXXXXXXXX
2010-039011
The General Rate Income Pool
Dear Sir,
This is in response to your email of December 14, 2010 in which you asked us for our comments on the above subject in the three situations summarized below. This also responds to emails from your colleague XXXXXXXXXX on January 10, 12 and 13, 2011 as well as telephone conversations (Mr. LeBlond/XXXXXXXXXX/XXXXXXXXXX) in which additional information was provided to us.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
Situation 1
- Corporation A and Corporation B are "Canadian-controlled private corporations" (“CCPCs"), as defined in subsection 125(7), whose "Fiscal Period", as defined in subsection 249.1(1), ends on December 31. Corporation A is "Connected" (within the meaning assigned by subsection 186(4)) to Corporation B.
- The "full rate taxable income" ("FRTI"), as defined in subsection 123.4(1), of Corporation A for its 2002 taxation year was $XXXXXXXXXX, and for its 2001, 2003, 2004 and 2005 taxation years was nil.
- Corporation A paid taxable dividends to Corporation B of $XXXXXXXXXX in 2003 and $XXXXXXXXXX in 2005.
- It follows that the amount for A in the formula for calculating the "general rate income pool addition for 2006" ("GRIPA 2006") in subsection 89(7) for Corporation A was $XXXXXXXXXX (i.e., 63% of $XXXXXXXXXX) and the amount for B in that formula was $XXXXXXXXXX.
- Corporation A claims that it had no amount of GRIPA 2006 to include in computing its "general rate income pool" ("GRIP"), as defined in subsection 89(1), for its 2006 taxation year.
- During the 2001 to 2005 taxation years, Corporation B earned no income other than the dividend income it received from Corporation A in 2003 and 2005, which was deductible in computing its taxable income for those years by virtue of subsection 112(1).
- In 2005, Corporation B paid a dividend totalling $XXXXXXXXXX to individual shareholders.
- As for Corporation B, the amount of GRIPA 2006 to be added in computing its GRIP for its 2006 taxation year was $XXXXXXXXXX.
Your Question about Situation 1
You inquired as to whether Corporation A and Corporation B correctly calculated the amount of GRIPA 2006 to be added in computing their GRIP for the 2006 taxation year as nil and $XXXXXXXXXX, respectively.
Situation 2
- Corporation C is a CCPC whose Fiscal Period ends on March 31.
- For the purpose of determining the amount of its GRIPA 2006, Corporation C performs the following calculation in respect of its 2003 taxation year:
- Taxable income for the year $XXXXXXXXXX
Minus:
-
- Income subject to the manufacturing and processing profits deduction (hereafter "MPPD") $
- Income subject to the small business deduction $
- Full rate taxable income before specified future tax consequences ("SFTC") $XXXXXXXXXX
Multiplied by 63%.
- GRIPA 2006 relating to the year 2003 $XXXXXXXXXX
- In its tax return for its 2006 taxation year, Corporation C reports a business loss of $XXXXXXXXXX that it carries forward to its 2003 taxation year.
- To calculate the balance of its GRIP at the end of its 2006 taxation year, Corporation C takes into account GRIPA 2006 in respect of its 2003 taxation year as well as the following calculation regarding the carry-back to that year of its $XXXXXXXX loss:
- GRIPA 2006 relating to the year 2003 $XXXXXXXXXX
- GRIP prior to adjustment for SFTC $XXXXXXXXXX
Minus:
- Total GRIP addition for the three preceding taxation years $
- GRIP at the end of the 2006 taxation year $
- Corporation C determined the GRIP addition amount of $XXXXXXXXXX by multiplying by 68% the amount by which Variable I ($XXXXXXXXXX - $XXXXXXXXXX = $XXXXXXXXXX) exceeds Variable J ($XXXXXXXXXX - $XXXXXXXXXX) of the formula in the description of B in the definition of GRIP.
Your Question about Situation 2
You are asking if, in Situation 2 and for the purpose of calculating the GRIP balance at the end of Corporation C's 2006 taxation year, should $XXXXXXXXXX of its income for the 2003 taxation year covered by the MPPD be taken into account?
Situation 3
- Corporation D and Corporation F are CCPCs with a Fiscal Period ending on December 31. Corporation D is Connected to Corporation F.
- Corporation D's FRTI for its 2005 taxation year is $XXXXXXXXXX and for its 2001 to 2004 taxation years is nil.
- In 2005, Corporation D pays Corporation F a taxable dividend of $XXXXXXXXXXX.
- According to Corporation D, the amount to be added in computing its GRIP for the 2006 taxation year as the GRIPA 2006 is $XXXXXXXXXX.
- During the 2001 to 2005 taxation years, Corporation F earned no income other than the dividend income it received from Corporation D in 2005 that was deductible in computing its taxable income for that year under subsection 112(1).
- According to Corporation F, it has no amount to add in computing its GRIP for its 2006 taxation year as GRIPA 2006.
Your Question about Situation 3
The figures arrived at by Corporation D and Corporation F in this case appear to you to be incorrect. You are asking us if we agree with you that: (1) Corporation D cannot add an amount as GRIPA 2006 in the calculation of its GRIP for the 2006 taxation year since, according to the formula for calculating GRIPA 2006, element A ($XXXXXXXXXX) minus element B ($XXXXXXXXXX) cannot be less than nil; and, (2) the amount to be added in computing Corporation F's GRIP for its 2006 taxation year as GRIPA 2006 is $XXXXXXXXXX (i.e., 63% X $XXXXXXXXXX), as it is reasonable to consider in the circumstances that $XXXXXXXXXX of the total dividend of $XXXXXXXXXX that Corporation F received from Corporation D was attributable to Corporation D's FRTI referred to in paragraph (a) of the description of A in the formula for calculating GRIPA 2006 for Corporation D.
Our Comments
Response to your Question on Situation 1
In Situation 1, based on the summary information you have submitted to us, we agree with the calculations of the amount of GRIPA 2006 to be added in the calculation of GRIP of Corporation A and Corporation B for their 2006 taxation year, i.e., nil and $XXXXXXXXXX, respectively.
Indeed, in the case of Corporation A, the amount of GRIPA 2006 to be added in the calculation of its GRIP is nil since the formula for calculating GRIPA 2006 provides that the excess of element A ($XXXXXXXXXX) minus element B ($XXXXXXXXXX) cannot be less than nil.
With respect to Corporation B, the amount of GRIPA 2006 to be added in the calculation of its GRIP is $XXXXXXXXXX, being the amount by which element A of the formula for calculating GRIPA 2006 ($XXXXXXXXXX) exceeds element B ($XXXXXXXXXX). In our view, the amount for A in the formula for the calculation of GRIPA 2006 for Corporation B is $XXXXXXXXXX since it is reasonable to consider, having regard to the circumstances, that an amount of $XXXXXXXXXX of the total dividends of $XXXXXXXXXX received by Corporation B from Corporation A was attributable to a FRTI in respect of Corporation A, which is referred to in paragraph (a) of A in the formula for the calculation of GRIPA 2006 for Corporation A.
Response to your Question on Situation 2
We are of the view that, in Situation 2, based on the summary information you have submitted to us, the amount of the adjustment in the calculation of Corporation C's GRIP balance at the end of its 2006 taxation year should not be determined by taking into account the amount of $XXXXXXXXXX of its income subject to the MPPD for its 2003 taxation year. Our conclusions are based on the following observations.
The calculation of the GRIP addition in respect of the MPPD is described in Part 2 of Schedule 53 "General Rate Income Pool (GRIP) Calculation" in accordance with the definition of GRIP and does not take into account the amount of income of a corporation subject to MPPD (the "MPPD Amount") for a particular taxation year, regardless of whether that amount may have been taken into account in the calculation of the GRIPA 2006.
We believe that Part 2 of Schedule 53 accurately reflects the application of the relevant provisions of the Act relating to the calculation of GRIP for a given year.
It is clear to us, having regard to the provisions of elements I and J of element B of the formula in the definition of GRIP, that the MPPD Amount for a taxation year is not taken into account for purposes of the calculations.
Response to your Question on Situation 3
For Situation 3, we agree with you that the GRIPA 2006 for Corporation D and Corporation F is nil and $XXXXXXXXXX, respectively.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope you find our comments of assistance and thank you for bringing these issues to our attention.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganization and Resource Industry Section
Corporate Reorganization and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.