Principal Issues: Whether the Ontario Special Additional Tax on Life Insurance Corporations (SAT) is considered a capital tax and is therefore deductible in computing income for tax purposes.
Position: The amount is deductible for federal and provincial purposes for taxation years ending after December 31, 2008. Consequently, when the SAT credit is applied to reduce income taxes payable in a subsequent year, it is taxable under 12(1)(x)(iv) as a reimbursement of an outlay or expense.
Reasons: The SAT is a provincial capital tax because it is paid on the taxable paid-up capital of the life insurance corporation. Provincial capital taxes are generally deductible.
March 21, 2011
XXXXXXXXXX Income Tax Rulings Directorate Andrea Boyle, CGA 2011-039501
Deductibility of OSAT for Tax Purposes
I am replying to your email dated February 4, 2011 in which you asked for our views on whether the Ontario Special Additional Tax on Life Insurance Corporations ("SAT") is deductible in computing a life insurance corporation's income for the income tax purposes.
Our comments
The SAT is currently assessed under section 63 of the Ontario Taxation Act, 2007. Under this section, a life insurance corporation carrying on business in Ontario at any time in the tax year is subject to SAT payable for a taxation year which is generally equal to the amount by which 1.25% of the corporation's taxable paid-up capital exceeds the total of the corporation's Ontario corporate income tax and corporate minimum tax payable for the year. For taxation years ending in 2009 and later, the SAT paid is added to the corporation's corporate minimum tax credit carry forward. This credit may then be deducted to reduce Ontario corporate income tax payable in future years.
In our view, the SAT is a "capital tax" and not an income tax. The SAT is based on a corporation's taxable paid-up capital and is payable by a life insurance corporation regardless of whether the corporation is earning profits or operating at a loss in a particular taxation year. In the absence of a specific prohibition in the Income Tax Act to the contrary, provincial capital taxes have been considered to be expenditures incurred for the purpose of gaining or producing income from a business or property and therefore deductible in computing income for federal income tax purposes. The fact that the SAT payable by a life insurance corporation in a particular year may be used to reduce the amount of Ontario income tax payable by the life insurance corporation in a subsequent year does not, in our view, alter the nature of the SAT.
For taxation years ending before January 1, 2009, subsection 11(27) of the Ontario Corporations Tax Act specifically denied a deduction from income for Ontario income tax purposes of the special additional tax paid by a life insurance company. There is no equivalent provision under the Ontario Taxation Act, 2007; under the Taxation Act, 2007, Ontario taxable income is equal to federal taxable income if a corporation only has a permanent establishment in Ontario.
Accordingly, it is our view that the SAT payable by a life insurance corporation for a taxation year ended after December 31, 2008, continues to be a deductible expenditure by the life insurance corporation in computing its income for federal income tax purposes and it is therefore a deductible expenditure by a life insurance corporation in computing its income for Ontario tax purposes.
As a consequence of this deductibility, when the SAT credit is applied to reduce Ontario corporate income taxes payable in a subsequent taxation year, we would consider it to be an amount received as a reimbursement of an amount that was deducted as an outlay or expense in a prior year, and the amount of the credit applied would be taxable under 12(1)(x)(iv). This position is consistent with the Canada Revenue Agency views expressed in paragraph 18 in Interpretation Bulletin IT-273R2 Government Assistance - General Comments and the "Application of paragraph 12(1)(x)" in Income Tax Technical News Issue No. 29 - July 14, 2003.
We trust that these comments will be of assistance.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch