| May 2, 1990 | |
| Halifax District Office | Head Office |
| Audit Review Section | Specialty Rulings |
| Dave Turner | |
| Kevin McGuigan | (613) 957-2094 |
SUBJECT: Nova Scotia Tax Reduction for New Small Business Corporations
We are writing in reply to your memorandum of February 21, 1990, concerning whether the Nova Scotia tax reduction for new small business corporations (the "Reduction") should be brought into the taxpayer's income under paragraph 12(1)(x) of the Income Tax Act (the "Act").
The Reduction is available to any newly formed Canadian-controlled private corporation ("CCPC") incorporated in Nova Scotia after April 18, 1986. The amount of the reduction depends on the CCPC's taxable income. The reduction is available during a CCPC's first two taxation years and can be as high as $20,000 per year. In your opinion, the Reduction should be treated in the same manner as the Nova Scotia research and development tax credit and added back to the CCPC's income in the taxation year in which the return is assessed. You have requested our comments.
Our Comments
In our opinion, the Reduction should not be added back to the income of the taxpayer for the following reasons:
1) Paragraph 12(1)(x) of the Act applies only to amounts received by a taxpayer in the year, in the course of earning income from a business or property. Unlike a research and development tax credit, the Reduction does not appear to relate in any direct manner to a CCPC's business or property. The Reduction is unrelated to any specific expenditures or assets but is rather a global reduction available in calculating the corporation's provincial income tax.
2) If it was accepted that the Reduction related to the earning of income from a business or property in a very broad sense, it would still have to be received under the conditions set out in subparagraph 12(1)(x)(iii) or (iv) before paragraph 12(1)(x) could apply. Subparagraph 12(1)(x)(iii) of the Act would be satisfied only if it could be shown that the Reduction vas an "inducement". It is possible to maintain that the Reduction is a form of incentive to promote the creation of small business corporations in Nova Scotia but, in our opinion, such treatment would have many undesirable consequences. For example, the following would be considered to be "inducements" and have to be added back to income under paragraph 12(1)(x) of the Act:
a) The Federal small business deduction, as it is an "inducement" to start a small business in Canada.
b) The manufacturing and processing profits deduction, as it is an "inducement" to start a manufacturing and processing business in Canada.
c) The difference between the higher provincial rates large corporations and the lower rates on income subject to the small business deduction, as the difference is an "inducement" to operate a small business.
Subparagraph 12(1)(x)(iv) of the Act would not apply as it requires the Reduction to be in respect of the cost of property or in respect of an expense and the Reduction relates to a corporations income, not to any property or expense.
It is therefore our conclusion that the Reduction should not be viewed as an amount received "in the course of" earning income from a business.
We trust that our comments will be of assistance.
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch