Principal Issues: [TaxInterpretations translation] In applying paragraphs 125(5)(a) and (b), is it possible that a taxpayer, having two fiscal year ending in the 2007 calendar year, could have a diminished business limit as a result of the change in the annual amount of the business limit from the 2006 to 2007 calendar years?
Position: No.
Reasons: In applying subsection 125(5) to a corporation for its 2007 or 2008 taxation year that began before 2007, subparagraph 125(5)(a)(i) is deemed to read as follows: "(i) the amount that would have been its business limit determined under subsection (3) or (4) for the first such taxation year ending in the calendar year if the reference to $300,000 in subsection (3), as it read in respect of that first such taxation year, had been read in the same manner as it read in respect of the particular taxation year ending in the calendar year". See subsection 33(10) of Bill C-28, assented to February 21, 2007.
XXXXXXXXXX 2009-030640 Nancy Turgeon, CGA March 4, 2009
Dear Sir,
Subject: Subsection 125(5) of the Income Tax Act
This is further to your fax of January 16, 2009 requesting our opinion on the application of subsection 125(5) on a change of fiscal year.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
You raised a hypothetical situation in which a group of corporations with a fiscal period end of February 28, 2007, amended their fiscal period end to December 31, 2007. One corporation in the group used the entire business limit. You believe that a literal application of subsection 125(5), as drafted, has the effect of depriving the corporation of a significant portion of the business limit given the change in the amount of the business limit from $300,000 in 2006 to $400,000 in 2007, where the fiscal period straddles two calendar years.
It is our view that the simultaneous application of paragraphs 125(5)(a) and 125(5)(b) has the effect of limiting the small business deduction on a change of fiscal year. However, it appears that subsection 33(10) of Bill C-28, assented to on February 21, 2007, specifies the use of the amount of $400,000 as the business limit, when applying subparagraph 125(5)(a)(i) in a situation such as yours.
Specifically, where a corporation has a taxation year straddling January 1, 2007, the business limit, calculated under paragraph 125(5)(a), for the second or subsequent taxation years must be the lesser of the following amounts:
- the business limit that would have been determined for the first taxation year ending in the calendar year if $400,000, not $300,000, were used to allocate amounts among associated corporations, and
- the business limit determined for the second or subsequent taxation years ending in the same calendar year.
In addition, the application of paragraph 125(5)(b) has the effect of limiting the business limit, otherwise calculated above, pro rata to the days in the last fiscal period.
These opinions do not constitute advance rulings and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding on us.
Best regards,
Phil Jolie
Director
Business and Partnerships Division
Income Tax Rulings Directorate.