2 April 1990 Income Tax Severed Letter AC00350 - Tax on Large Corporations - Resource Industry

FROM
     FILE                              DE Allan B. Nelson
                                          Resource Industry
                                            Section
                                          957-8984

SUBJECT:                                                  FILE
     Proposed Part 1.3 of the Income Tax
     Act
     Tax on Large Corporations
     Resource Industry Issues

Overview

New Part 1.3 of the Act, as passed by the House of Commons on December 20, 1989, proposes to levy a 0.175% annual tax on a corporation's capital employed in Canada in excess of $ 1O million.

Generally speaking, this tax will be payable for taxation years ending after June, 1989 and will be required to be paid in monthly instalments commencing in 1990. The new tax viII be creditable against the 3% corporate surtax imposed under section 123.2 of the Act to the extent that it is levied on income earned in Canada.

Relevant Sections

Subsection 181.1(l) of the Act sets the annual rate of the Part 1.3 tax at 0.175% of a corporation's taxable capital employed in Canada in excess of its canital deduction for the year.

Subsection 181.2(1) of the Act provides that the taxable canital emnloyed in Canada of a corporation (other than a financial institution or a corporation that was throughout the year not resident in Canada) is to be determined under the Regulations.

On February 1, 1990, Finance released draft Regulation 8600 for this purpose.

Subsection 181.2(2) of the Act defines the taxable capital of a corporation (other than a financial institution) for a taxation year as the amount, if any, by which its capital for the year (defined in subsection 181.2(3) of the Act) exceeds its investment allowance for the year (defined in subsection 181.2(4) of the Act).

Section 181.5 of the Act provides that the canital deduction of a corporation for a taxation year is $ 10 million. It also provides for a sharing of the $ l0 million amount between related corporations.

Meeting with Finance

In response to numerous queries received from Revenue Canada concerning the proposed Part 1.3 tax; Finance agreed to attend a meeting with us to discuss their intent and policy considerations inherent in the drafting of the Part 1.3 legislation.

On March 20, 1990, Doug McFadyen, Brian Ernewein and Dan McIntosh all of the Department of Finance met with numerous officials of the Rulings Directorate of Revenue Canada from the Bilingual Services Sections, Financial Institution Section, Teasing and Financing Section and the Resource Industries Section.

To assist us in replying to a query recently received from the Calgary District Office (our file 7-4766), A . Nelson of the Resource Industries Section posed the following queries relating to the Oil and Gas Industry:

Section Chief Resource Industries Section Bilingual Services and Resource Industries Division Rulings Directorate