Principal Issues: Paragraph (b) of the definition of “specified corporate income”.
Position: General comments provided.
Reasons: See below.
STEP CRA Roundtable – June 13, 2017
QUESTION 1. Paragraph (b) of the Definition of “Specified Corporate Income”
The inclusion of paragraph (b) in the definition of specified corporate income (“an amount that the Minister determines to be reasonable in the circumstances”) in subsection 125(7) creates significant uncertainty in the application of the small business deduction rules. This kind of administrative discretion by the Minister over the determination of an amount, outside of the realm of valuation and arm’s length price, appears to be without precedent in the context of the Income Tax Act. Can the CRA advise on how the Minister intends to exercise its administrative discretion in relation to this proposed provision, and in what circumstances would it do so?
CRA Response
The definition of “specified corporate income” (“SCI”) of a corporation for a taxation year in subsection 125(7) is determined by the lesser of two amounts (a) and (b), with (b) being an amount that the Minister determines to be reasonable in the circumstances.
The Department of Finance Explanatory Notes indicate that “The Minister could determine a lower amount than the above amount (i.e. the paragraph (a) amount) to be the reasonable amount if, for example, the higher amount includes income that is reasonable to consider to be attributable to or derive from income that would not be eligible for the small business deduction.”
What is reasonable or not in the circumstances remains a question of fact that can only be made once all the relevant facts of a particular situation are known and have been fully considered. The CRA will only be able to provide specific examples once it has had the opportunity to fully consider specific fact situations involving a taxpayer’s computation of income otherwise determined under subparagraph (a)(i) of the definition of SCI. However, as the Act clearly indicates that the SCI is the lesser of (a) and (b), Minister’s discretion would be used only in situations where it is determined that the SCI should be reduced.
2017-069346
Katie Robinson