Principal Issues: 1) In the first given fact situation, a public corporation acquires all of the issued and outstanding shares of the capital stock of a target corporation ("Target") on January 1, 2006. Prior to this acquisition, Target was a Canadian-controlled private corporation. No election under subsection 256(9) is made in that respect. The fiscal period of Target normally ends on December 31 of each year. Whether subsection 89(8) (low rate income pool ("LRIP") addition) would apply in this first given fact situation. 2) The facts relating to the second given situation are identical to those relating to the first given situation, except for the following elements. The acquisition of control of Target occurs on January 1, 2008. The application of subsection 89(8), without taking into consideration variable C of such provision, would result in an LRIP addition of $XXXXXXXXXX at Target level. However, Target would also sustain a non-capital loss of $XXXXXXXXXX in its 2008 taxation year. The deductibility of such non-capital loss would not be restricted under the ITA. Furthermore, Target would not carry-back this non-capital loss to offset taxable income in taxation years prior to 2008. Whether the amount of the LRIP addition under subsection 89(8) would be $XXXXXXXXXX in the second given fact situation.
Position: 1) Yes. 2) No. The amount of the LRIP addition under subsection 89(8) should be $XXXXXXXXXX in the second given fact situation.
Reasons: Wording of the Act.
2009-032588 XXXXXXXXXX S. Prud'Homme (613) 957-8975 August 28, 2009
Dear XXXXXXXXXX,
Subject: Request for Technical Interpretation - Subsection 89(8) of the Income Tax Act.
This is in response to your letter of May 12, 2009 in which you requested our opinion regarding the application of subsection 89(8) of the Income Tax Act (the "Act") in two specific situations.
Unless otherwise indicated, any statutory reference herein is to a provision of the Act.
It appears to us that the situations described in your letter and summarized below could constitute actual situations 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. If your situations involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documents to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be of assistance. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. As a result, and given that your letter only briefly describes two hypothetical situations, the comments we make below may not apply in full to a particular situation.
1) First Particular Situation
You have presented us with the situation briefly described below (the "First Particular Situation") as part of your request for a technical interpretation.
(a) A corporation ("Target") was a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7) prior to its acquisition as described below. Target's fiscal periods ended on December 31 of each year.
(b) A corporation ("Pubco") that was a public corporation as defined in subsection 89(1) acquired all of the issued and outstanding shares of the capital stock of Targetco on January 1, 2006. No election under subsection 256(9) were made in this regard.
c) Subsequent to its acquisition of control by Pubco, Target maintained December 31 as its fiscal period end.
2) Your comments and questions regarding the First Particular Situation
You first indicated that, as a result of the application of subsection 249(4), Target had a deemed tax year-end of December 31, 2005, its regular year-end.
Furthermore, you noted that subsection 89(8) applies to taxation years that end after 2005. Thus, since the calculation of Target's low rate income pool ("LRIP") would be required to be made at some point in its 2006 taxation year, the provisions of subsection 89(8) would technically appear to apply even if the "preceding taxation year" referred to in that provision was the taxation year ended December 31, 2005 under the First Particular Situation.
In addition, in your view, no amount could be determined for Target in respect of element I in the formula provided for in element H of subsection 89(8) since the definition of general rate income pool ("GRIP") is not applicable for the 2005 taxation year.
In light of the foregoing, you are of the view that, in determining the balance of its LRIP at any time in its 2006 taxation year, Target would be required to include an amount pursuant to the application of subsection 89(8). However, due to the special circumstances relating to the First Particular Situation, Target would not be able to reduce this amount by what would have been attributable to GRIP had the definition of GRIP been applicable on December 31, 2005.
You first wish to know whether the Canada Revenue Agency ("CRA") shares your view that subsection 89(8) would be technically applicable in the First Particular Situation.
To the extent that the CRA agrees with you on this point, you are interested in knowing how, from a tax policy perspective, the CRA justifies what you believe to be an overstatement of Target's LRIP resulting from its inability to benefit from the GRIP balance that it would have otherwise enjoyed had its change in status occurred after January 1, 2006.
3) Second Particular Data
You have also presented us with a second situation briefly described below (the "Second Particular Situation") as part of your request for a technical interpretation. The facts relating to the Second Particular Situation are identical to those relating to the First Particular Situation, except for the following:
(a) The acquisition of control of Target by Pubco occurred on January 1, 2008.
(b) The result of applying the provisions of subsection 89(8), at any time in Target's taxation year ending December 31, 2008 and without taking into account element C in subsection 89(8), was $XXXXXXXXXX.
(c) For its taxation year ending December 31, 2008, Target incurred a non-capital loss (the "Operating Loss") of $XXXXXXXXXX. The Operating Loss was not subject to any restriction on its deductibility and was not carried back against Targetco's taxable income for any taxation year of Target prior to 2008.
(d) Finally, no other events that would otherwise increase or decrease Target's LRIP occurred between the acquisition of control and December 31, 2008.
4) Your comments and questions regarding the Second Particular Situation
You stated that paragraph (a) of the description of C in the formula in subsection 89(8) establishes a fiction regarding what is to be included, in the computation of Target's LRIP, of all losses "deductible under subsection 111(1) in computing its taxable income for that preceding taxation year ...".
However, you note that paragraphs 111(1)(a) and (b), inter alia, provide that non-capital losses and capital losses incurred in the following three taxation years are deductible against a corporation's taxable income for a particular year.
Thus, with respect to the calculation of C in the formula in subsection 89(8), you are of the view that, for the purposes of the Second Particular Situation, the Operating Loss incurred in the 2008 taxation year would be deductible in Target's taxable income for its taxation year ending December 31, 2007. Consequently, the amount of Target's LRIP resulting from the application of subsection 89(8) in the Second Particular Situation should, in your view, technically be increased by the amount of the Operating Loss of $XXXXXXXXXX to total $XXXXXXXXXX. You wish to know if the CRA shares your view on this.
To the extent that the CRA shares your views on this point, you are interested in knowing how, from a tax policy perspective, the CRA can reconcile this position with Parliament's desire, in your view, to provide maximum certainty to dividend recipients with respect to the tax consequences of dividends.
5) Our comments on this file
Response to questions respecting the First Particular Situation
It is our view that subsection 89(8) is technically applicable in the context of the First Particular Situation.
In addition, you also raise a tax policy issue with respect to the application of subsection 89(8) in the First Particular Situation. As you are aware, responsibility for tax policy development and amendments to the Act rests with the Department of Finance. If you wish to make representations concerning amendments to the Act, you may send your comments to the Department of Finance, Tax Policy Branch, Tax Legislation Division, L'Esplanade Laurier, 140 O'Connor Street, 17th Floor, East Tower, Ottawa, Ontario, K1A 0G5.
Response to the questions respecting the Second Particular Situation
We disagree with your interpretation and application of subsection 89(8) in the Second Particular Situation.
In this regard, you recognized that your interpretation would create uncertainty for taxpayers in determining the initial LRIP of a corporation that ceased to be a CCPC.
In addition, we are of the view that adopting such an interpretation of element "C" of subsection 89(8) or (4) would lead to results that do not appear to us to be consistent with the tax policy underlying these legislative provisions. In this regard, the Department of Finance's technical notes to subsection 89(8) state, inter alia, the following:
In broad terms, this formula is intended to determine what the corporation's LRIP would have been at the end of its preceding taxation year had it been neither a CCPC nor a DIC [deposit insurance corporation] in that taxation year. (...)
C generally provides that the amount will be increased to the extent that the corporation has unused and unexpired losses at the end of its preceding taxation year.
(our emphasis).
On the other hand, the Department of Finance's technical notes to subsection 89(4) state, inter alia, the following:
In broad terms, this formula is intended to determine what the corporation’s GRIP would have been at the end of its preceding taxation year had it been either a CCPC or a DIC in that taxation year. (...)
C generally provides that the amount will be increased to the extent that the corporation had unused and unexpired losses at the end of its preceding taxation year.
(our emphasis).
Consequently, and based on a textual, contextual and purposive interpretation of subsection 89(8) and the eligible dividend rules, it is our view that in a situation similar to the Second Particular Situation, only the amount of losses incurred by a particular corporation before the loss of its CCPC status that would be deductible and not yet deducted under subsection 111(1) in computing its taxable income for its taxation year before the change in status would be included in element C in subsection 89(8).
Thus, we are of the view that the amount of Targetco's LRIP resulting from the application of subsection 89(8) in the Second Particular Situation should be $XXXXXXXXXX, and not $XXXXXXXXXX.
We hope you will find our comments of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.