Principal Issues: 1) Whether the additional tax from a previous taxation year can be deducted from the tax on split income (TOSI) pursuant to subsection 120.2(1) ITA. 2) Whether Form T691 remained unchanged after June 25, 2013 with respect to the calculation of the additional taxes paid for minimum tax carryover purposes. 3) Whether the additional tax determined under subsection 120.2(3) for minimum tax carryover purposes should include the TOSI by subtracting it from the individual’s tax payable under Part I of the ITA as suggested by line 113 of Form T691.
Position: 1) No. 2) The form has not been modified since the amendment of subsection 120.2(3) ITA on June 26, 2013 with respect to its part 7 which deals with the calculation of the additional taxes paid for minimum tax carryover. 3) The additional tax determined under subsection 120.2(3) ITA for minimum tax carryover purposes should not include the TOSI by subtracting it from the individual’s tax payable under Part I of the ITA contrary to what is currently suggested by line 113 of Form T691.
Reasons: 1) Language of subsection 120.2(1) ITA. 2) Form T691 will be amended for taxation years 2021 and following to reflect the current wording of paragraph 120.2(3)b) of the ITA and will published at the beginning of 2022. 3) Paragraph 120.2(3)b) was amended in 2013, for the year 2000 and subsequent taxation years, to ensure that the additional tax does not include the TOSI under section 120.4. The CRA will correct the application of subsections 120.2(1) and (3) ITA, but will not issue new notices of assessment for taxation years prior to 2021 modifying the related amount of tax payable for those years.
FEDERAL TAX ROUNDTABLE, OCTOBER 7, 2021
APFF CONFERENCE 2021
Question 6
Relationship between the alternative minimum tax and the split income tax
The TOSI contained in section 120.4 only applied to individuals who were 17 years of age or younger in a particular taxation year from its coming into force in the 2000 taxation year. The scope of section 120.4 was expanded in 2018, so that the TOSI is potentially applicable to all individuals, regardless of age. In this context, it is more common to see taxpayers subject to both the AMT and TOSI in the same taxation year.
Section 127.5, which contains the tax provisions relating to the AMT, came into force in 1986. The AMT applies to individuals who would not otherwise be required to pay tax because of the application of certain tax preferences to income earned in a particular year. Section 120.2 provides that, for a particular year, an amount may be deducted from the tax payable based on the additional tax payable for the preceding seven years.
We understand that, by virtue of paragraph 120.2(1)(b), the amount of minimum tax carried forward that may be deducted in a particular taxation year may not be deducted against tax payable on account of TOSI
In general, subsection 120.2(3) sets out the method for calculating the additional tax that will be carried back seven years:
(a) The individual's minimum tax for that year, less
(b) the individual's tax otherwise payable, less:
-
section 120(b) [tax on income not earned in a province];
-
section 126 [foreign tax credit]; and
-
section 127 [investment tax credit]
-
section 127.4 [labour-sponsored funds tax credit]
We understand that, as it read until June 25, 2013, the minimum tax calculated pursuant to paragraph 120.2(3)(b) reduced the individual's tax for a particular year on the split income subject to TOSI. We understand that the Income Tax Act has since been amended to no longer reduce the tax for the particular year on the split income subject to TOSI for that year.
Line 113 of Part 7 of CRA's "T691 - Alternative Minimum Tax" form provides for the deduction of TOSI from the federal tax applicable for a year, which had the result of the split income for the year being transformed into a minimum tax carryover for deduction from tax (other than TOSI) for a future year.
Questions to the CRA
a) Does the CRA agree with the position that the minimum tax for a prior year cannot be deducted from TOSI in a particular taxation year?
b) Can the CRA confirm that the T691 form has remained unchanged as between the versions prior to and subsequent to June 25, 2013, regarding the computation of additional tax under s. 120.2(3)?
(c) Can the CRA confirm that its position is to permit the reduction of tax otherwise payable by the amount of split income for a particular year, as indicated on Form T691 (which seems to be contrary to s. 120.2(3))?
CRA response to question 6(a)
Generally, the preamble to subsection 120.2(1) states that the portion of the total of the individual’s additional taxes is deductible from the individual's tax payable under Part I, without reference to, inter alia, subsection 120.4(2) (i.e., without reference to TOSI). That deduction is generally equal to the portion of the individual’s additional taxes determined under subsection 120.2(3) for the seven taxation years immediately preceding the particular year that was not deducted in computing the individual’s tax payable under under Part I for those preceding years.
In view of the foregoing, we are of the view that an additional tax assessed for a particular prior year in respect of the minimum tax provided for in section 127.5 may not be deducted against the TOSI in a particular taxation year.
CRA response to question 6(b)
We confirm that Part 7 of Form T691 applicable to the calculation of the additional tax under subsection 120.2(3) remained unchanged following the amendment to the Income Tax Act on June 26, 2013, which modified paragraph 120.2(3)(b) to remove the reference to subsection 120.4(2).
Form T691 will be amended at the beginning of 2022, for the 2021 taxation year, to delete lines 113 and 114 in accordance with paragraph 120.2(3)(b).
CRA response to question 6(c)
Generally, subsection 120.2(3) provides that the amount of additional tax that an individual may deduct for a taxation year under subsection 120.2(1) is the amount by which the applicable minimum tax for that year exceeds an amount adjusted under, inter alia, paragraph 120.2(3)(b). The terms of paragraph 120.2(3)(b) therefore do not allow the amount of the TOSI for a particular year to be reduced by the tax payable under Part I if the individual were not entitled to any of the deductions provided for under sections 126, 127 and 127.4.
The CRA does not have a general administrative policy on the implications of a correction to a CRA form that may result in a reassessment for prior taxation years. Rather, those situations are considered on a case-by-case basis. With respect to the amendment to Form T691, the CRA will correct the application of subsections 120.2(1) and 120.2(3), but will not issue reassessments for taxation years prior to 2021 changing the amount of tax payable that relates to that correction. System changes are being implemented so that additional tax amounts are computed using line 113 of Form T691 for taxation years prior to 2021 only and the unused additional tax balance resulting from line 113 for those years is available for the 2021 and subsequent taxation years.
Sophie Larochelle
(438) 342-6801
October 7, 2021
2021-090096
Response prepared in collaboration with:
Jonathan Tulk, Stakeholder Relations Division
Individual Returns Directorate
Assessment, Benefit and Service Branch