CANADIAN TAX FOUNDATION SEPTEMBER 1991
QUESTION 44 - PRE-INCORPORATION CONTRACTS
QUESTION
Subsection 21(2) of the Ontario Business Corporations Act indicates that a corporation may, within a reasonable time after it comes into existence, adopt an oral or written contract made on its behalf before it came into existence. Upon the adoption of the oral or written contract, the subsection provides that the corporation is bound by the contract and is entitled to its benefits as if the corporation had been in existence at the date of the contract.
What is the position of Revenue Canada in respect of the reporting of pre-incorporation income when section 21 of the OBCA is operative? If the income may be reported by the corporation, will the small business deduction be allowed?
What is the timing of the income recognition -- i.e. is it after the date of incorporation? Will the Department extend the 53-week fiscal requirement if income is recognized prior to incorporation?
DEPARTMENT'S POSITION
(a) As stated in paragraph 2 of IT-454 the Department is of the opinion that: "A corporation subject to this legislation should commence to account for transactions under such a contract from the time at which such a contract is adopted by it and should in that year account for any benefits or costs arising from the contract prior to that time. Any benefits previously received by the promoter should be recovered by the corporation, and any costs incurred by the promoter should be reimbursed."
The small business deduction would be available for any of this income which represented active business income earned by a Canadian controlled private corporation.
(b) As the pre-incorporation income is reported after the date of incorporation, there is no need to extend the fiscal year merely because of the pre-incorporation income.
Canadian Tax FoundationNovember 1991L. HollowaySection 23Question #44