ROUND TABLE - CGA - JANUARY 10, 1992
Officer: M P Sarazin
File: 7-912209
QUESTION #4
How should we take into account investment tax credits in the computation of income earned or realized by a corporation after 1971 ("safe income") for the purposes of subsection 55(2) of the Act?
ANSWER
A corporation that acquires property or incurs an expense that entitles it to an investment tax credit, as defined in subsection 127(9) of the Act ("ITC") would benefit from the ITC by claiming a deduction from its tax otherwise payable under Part I of the Act or would be deemed to an have paid an amount on account of his tax under Part I, as allowed by subsection 127.1(1) of the Act.
If the ITC were deducted from the tax payable pursuant to subsection 127(5) of the Act, the following would occur:
i) The amount deducted would reduce the capital cost of depreciable property, the undepreciated capital cost of depreciable property, the adjusted cost base of capital property or the amount otherwise deductible by the corporation with respect to certain expenses; or
ii) if the amount deducted pursuant to subsection 127(5) of the Act is not reflected in any of the ways described in (i) above, the amount of the ITC deducted in the previous year would be included in the computation of the corporation's income, under paragraph 12(1)(t) of the Act.
In a case where (i) above is applicable and the property is depreciable property, its capital cost would be reduced under subsection 13(7.1) of the Act in the year following the deduction under subsection 127(5) of the Act.
Since the reduction of the capital cost would reduce the capital cost allowance that could otherwise be deducted, the corporation's income is increased by the reduction in the capital cost. Similarly, an ITC relating to a scientific research expenditure would reduce scientific research expenditures under paragraph 37(1)(e) of the Act. Therefore, the corporation's income is increased by the reduction in the expenditures.
When (ii) above applies, under paragraph 12(1)(t) of the Act an amount equal to the ITC claimed is added to the corporation's income in the year following the deduction and the corporation is liable for tax on this additional income.
This means that the reduction of the Part I tax otherwise payable under subsection 127(5) of the Act would affect the corporation's safe income only in the years following the ITC claim.