Principal Issues: [TaxInterpretations translation] Can the taxpayer change its fiscal period?
Position: No.
Reasons: IT-179R, paras. 2 & 3.
December 1, 2000
XXXXXXXXXX Tax Services Office ADMINISTRATION CENTRALE Income Tax Rulings Directorate Business desk Alain Godin (613) 957-2745 Attention: XXXXXXXXXX 2000-005516
Change of Fiscal Period
This is in response to your memo of November 8, 2000, requesting our opinion on a request for a change of fiscal period. You have attached a copy of the original request from the client's lawyer and a handwritten letter from the Research and Development Division, as well as a summary of the steps taken in the account.
All legislative references below are to the provisions of the Income Tax Act (the “Act”), R.S.C. 1985 (5th Supp.), c.1, as amended.
The Situation
- XXXXXXXXXX was, until XXXXXXXXXX, a Canadian-controlled private corporation (a “CCPC”) within the meaning of subsection 125(7) of the Act. On XXXXXXXXXX, the shareholders of XXXXXXXXXX signed a share exchange agreement (the “Agreement”) with a U.S. corporation, XXXXXXXXXX.
- Under the Agreement, XXXXXXXXXX undertook to acquire all the issued and outstanding shares of XXXXXXXXXX. This acquisition was to be formalized in a closing within XXXXXXXXXX of the date of the Agreement.
- XXXXXXXXXX's regular fiscal period ended on XXXXXXXXXX. Pursuant to subsection 249(4), the current year of XXXXXXXXXX ended immediately prior to the acquisition of control of XXXXXXXXXX by XXXXXXXXXX.
- Paragraph 251(5)(b) applied from the time the Agreement was signed, with the result that XXXXXXXXXX lost its CCPC status for the entire period since XXXXXXXXXX.
- The loss of CCPC status had a significant effect on its investment tax credit claim in respect of its scientific research and experimental development expenditures.
Your Position
You would like our opinion XXXXXXXXXX.
Representations
- XXXXXXXXXX’s representative requests that XXXXXXXXXX's fiscal period end on XXXXXXXXXX pursuant to subsection 249.1(7). This would allow XXXXXXXXXX to be a CCPC throughout its taxation year ending on XXXXXXXXXX.
- The representative maintains that paragraph 3(c) of Interpretation Bulletin IT-179R supports his position, since it shows that the Agency is prepared to grant a change of fiscal period for tax-related reasons.
Our Comments
We are of the view that you should refuse to grant the requested change of fiscal period. Interpretation Bulletin IT-179R, dated May 28, 1993, states in paragraph 2 that a taxpayer may not change the usual and accepted fiscal period without approval from the Minister, and that this requirement is to prevent taxpayers from rearranging their fiscal periods primarily to minimize taxes. It also states that requests for changes in fiscal periods will be approved if they can be demonstrated to be prompted solely by sound business reasons other than obtaining tax benefits.
In the case of XXXXXXXXXX, we consider that the request is motivated by the desire to obtain a tax benefit since a taxpayer cannot benefit from the increased investment tax credit under subsection 127(10.1) if the corporation was not throughout its taxation year a Canadian-controlled private corporation. The representative points out that paragraph 3(c) of such Interpretation Bulletin gives as an example of “sound business reasons” for a request to change the fiscal period of the business so that it ends on the day immediately preceding that of a rollover where the only purpose for such change is to enable capital cost allowance to be deducted in the last fiscal period ending before the transfer. We fully understand the taxpayer's position and the parallel he is seeking to draw. However, we are of the view that you should not grant this request, since the special credit and the deduction granted to small businesses under subsection 125(1) are reserved for corporations that maintain their CCPC status throughout their taxation year. We are also of the view that, generally speaking, the exception mentioned in paragraph 3(c) of the Interpretation Bulletin should be reserved for situations that are relatively identical to the one presented there.
Finally, paragraph 3 of the Interpretation Bulletin states that normally a retroactive change will not be approved. Permission to change the taxpayer's fiscal period now would constitute a retroactive change.
We hope that our comments will help you resolve this matter. Should you require additional information regarding this matter, please do not hesitate to contact us.
Please note that a copy of this memo will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. 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 Legislative Access Bank 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 (613) 957-0682. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.
Best regards,
Alain Godin
for the Director
Corporate Reorganizations and
International Operations Division
Income Tax Rulings Directorate
Policy and Legislation Branch