Principal Issues: [TaxInterpretations translation]
Is the corporate minimum tax ("CMT"), provided for in sections 57.1 to 57.12 of the Corporations Tax Act, deductible under the Income Tax Act (the "Act")?
Position:
No
Reasons:
Provincial income tax is not deductible by virtue of paragraph 18(1)(a). Since CMT is a provincial income tax, it cannot be deducted from income under the Act.
December 16, 2008
Quebec Tax Services Office Headquarters
Ontario Corporate Tax Division
Attention: Louise Laroche I. Landry, M. Fisc.
2008-030036Deductibility of Corporate Minimum Tax (Ontario)
This is further to your email of November 17, 2008 asking whether the corporate minimum tax ("CMT") provided for in sections 57.1 to 57.12 of the Corporations Tax Act is deductible under the Income Tax Act (the "Act").
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
Our Comments
The CMT was introduced to ensure that all large companies making a profit in a particular year pay tax. In fact, thanks to certain credits, deductions or other credits, many large corporations paid little or no tax, despite making a profit in the taxation year.
The CMT is essentially a second calculation of income tax that must be made by large corporations with total revenues in excess of $10 million or total assets in excess of $5 million. The CMT rate is 4% of the corporation's adjusted net income in accordance with its financial statements, allocated to Ontario. The CMT is therefore a calculation of tax based on a corporation's income, with adjustments, appearing in its financial statements.
Corporations are subject to the CMT only if the CMT is greater than the income tax payable for a particular taxation year.
Paragraph 18(1)(a) denies the deduction of an expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property. Case law has established in Roenisch v. M.N.R., 1 DTC 199 (Ex. Ct.), reiterated in First Pioneer Petroleums Ltd. v. M.N.R., 74 DTC 6109 (F.C.T.D.) and Teck Corporation v. The Queen, 2005 DTC 5338 (B.C.C.A.), that provincial income tax is not an expense incurred or paid to earn income:
"It is self-evident that the amount of the income tax paid to the province is not an expense for the purpose of earning the income, within the meaning of 6a. When such payment of taxes is made to the province, it is not so made to earn the income, it is paid because there is an income showing gain and profit."
The definition of income tax given in Lord Macnaghton in London County Council v. A.G. (1988), 4 T.C. 265, 283 (H.L.), as cited in Teck Corporation, is "Income tax, if I may be pardoned for saying so, is a tax on income".
Since the CMT is a tax effectively calculated on income, it is therefore not deductible by virtue of paragraph 18(1)(a).
Access to Information
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 your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope these comments are of assistance.
Louise J. Roy, CGA
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.