Principal Issues: Does the CRA allow the taxable capital gain realized by a corporation in a particular situation to be taken into account for purposes of the general tax deduction under subsection 123.4(2)?
Position: No.
Reasons: Wording of the Act.
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4. Deduction for corporate charitable donation and sale of assets in the same year
It is not uncommon for an entrepreneur to consider a charitable donation following the sale of the individual’s business and business assets, with the goal of contributing to the common good of society in return for the successful life that has been conferred. From the entrepreneur’s perspective, the gift is conceptually related to the sale and is even a consequence of it.
We know that the sale of certain corporate assets can trigger a capital gain, the taxable portion of which would be taxed at a rate of 38.67% federally for a combined federal/Quebec rate of 50.17%, while active business income without a small business deduction is taxed at a rate of 15% federally for a combined federal/Quebec rate of 26.5%.
Pursuant to section 110.1, a corporation may claim a deduction in computing its taxable income for charitable donations for the year in which it makes a gift, or for any of the five subsequent years.
Consider the following examples:
| Example 1 | Example 2 | |
| Year-end: | December 31, 2021 | December 31, 2021 |
| Date of sale: | December 15, 2021 | January 6, 2021 |
| Date of donation: | December 30, 2021 | December 30, 2021 |
| Business income for the year 2021: | $1,000,000 | $0 |
| Taxable capital gain on sale: | $2,000,000 | $2,000,000 |
| Donation considered : | $100,000 | $100,000 |
For the purpose of computing a corporation’s tax payable for a year, section 123.4 provides for a reduction of the corporation’s tax on its full rate taxable income for the year, which does not include, inter alia, the eligible portion of taxable capital gains.
Where a corporation realizes both business income and a capital gain in the year in which it makes a gift, the mechanism for calculating the corporation’s tax liability for that year under section 123.4 appears to ensure that the gift does not reduce, in whole or in part, the tax payable on the taxable capital gain, which is taxed at a higher rate.
Consequently, in a situation where a corporation makes a gift following the sale of its business, the sale of the business at the end of the fiscal year appears to be disadvantageous compared to the sale of the business at the beginning of the fiscal year where the corporation will have little or no business income earned during the year. However, the entrepreneur may not have the luxury of choosing the most advantageous date.
Question to the CRA
Could the CRA consider allowing the donation deduction against the taxable capital gain realized on the sale of a business where the donation occurs in the same year as the sale and business income is also realized in the same year?
CRA Response
Pursuant to paragraph 110.1(1)(a), a corporation may be entitled to a charitable donations deduction in computing taxable income for a taxation year where it makes a gift to a qualified donee.
A corporation's taxable income is generally subject to tax at the rate determined under subsection 123(1).
In addition, subsection 123.4(2) provides that a corporation may deduct from its tax otherwise payable under Part I for a taxation year the product obtained by multiplying its general rate reduction percentage for the year by its “full rate taxable income” for the year as defined in subsection 123.4(1).
Where a corporation is a CCPC, full rate taxable income is determined under paragraph (b) of that definition in subsection 123.4(1). For such a corporation, full rate taxable income is its taxable income subject to tax under subsection 123(1) reduced by, inter alia, its aggregate investment income as defined in subsection 129(4).
Aggregate investment income includes, inter alia, the eligible portion of taxable capital gains.
There is no provision in the Income Tax Act as currently drafted that allows a charitable deduction to be taken into account in computing a corporation's aggregate investment income. The CRA is responsible for the administration of the Income Tax Act as passed by Parliament and cannot go beyond the provisions included therein.
Lyne Gélinas
(438) 334-3528
October 7, 2021
2021-089599