Principal Issues: Is the future income tax asset an asset that is used principally in an active business carried on in Canada for the purpose of the definition of "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) and for the purpose of the definition of "small business corporation" ("SBC") in subsection 248(1)?
Position: In our view, a future income tax asset is not an asset for the purpose of the definition of SBC and the purpose of the definition of QSBCS.
Reasons: The Act
FEDERAL TAXATION ROUND TABLE 11 OCTOBER 2013
2013 APFF CONFERENCE
Question 25
Effect of a future income tax asset on the qualification of a "qualified small business corporation share" and a "small business corporation".
In Technical Interpretations 2000-001582 (footnote 1) and 2008-028530 (footnote 2), the CRA stated that a future tax asset presented on a corporation's balance sheet constitutes an asset for the purpose of the definition of "qualified small business corporation share" ("QSBCS") in subsection 110.6(1) and the definition of "small business corporation" ("SBC") in subsection 248(1). However, the CRA stated that such a future income tax asset is not an asset used principally in an active business for the purposes of the two definitions above.
Question to the CRA
Can the CRA confirm that a future income tax asset is an asset used in an active business for the purposes of the definition of QSBCS in subsection 110.6(1) and the definition of a SBC in subsection 248(1)?
CRA Response
According to Section 3465 (footnote 3), “future income tax assets” are the amounts of income tax benefits arising in respect of deductible temporary differences; the carryforward of unused tax losses; and the carryforward of unused income tax reductions, except for investment tax credits.
According to IAS 12 (footnote 4), "deferred tax assets” are deductible temporary differences; the carryforward of unused tax losses; unused tax losses carried forward; and the carryforward of unused tax credits.”
Despite the terminological differences between Section 3465 and IAS 12, the CRA considers that there is no material difference between the terms "future income tax assets" and "deferred tax assets" for the purposes of the two definitions above.
In short, in determining whether a share is a QSBCS, it is necessary to take into account, in particular, the fair market value of the assets attributable to assets used principally in an active business that the corporation or a corporation related to it is carrying on. The same is true in determining whether a corporation is a SBC.
The CRA is of the view that a future income tax asset is not an asset for the purposes of the definition of QSBCS and the definition of SBC. Consequently, the future income tax asset should not be taken into account in determining whether a share is a QSBCS or whether a corporation is a SBC.
Furthermore, where a future income tax asset becomes a tax receivable, this tax must be considered as an asset in determining whether a share is a QSBCS or a corporation is a SBC. The tax receivable may be an asset used in the active carrying on of a business for the purposes of the definition of QSBCS and the definition of SBC if the tax receivable arose from the active carrying on of a business. For example, the CRA is of the view that an amount of tax receivable due to the carryback of a loss from an active business is an asset used primarily in the business that the corporation is actively carrying on for purposes of both definitions.
This interpretation of the future income tax asset represents a change of position with respect to our response to question 29, which was put to us at the 2008 Federal Taxation Roundtable of l'Association de planification fiscale et financière [APFF]. Similarly, the position stated in Interpretation 2000-001582 is no longer represents the opinion of the CRA.
The same interpretation applies to deferred tax assets.
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Revenue Agency, Technical Interpretation 2000-001582, 2 October 2000.
2 Canada Revenue Agency, Technical Interpretation 2008-028530, 10 October 2008.
3 "Income Taxes", in CANADIAN INSTITUTE OF CHARTERED ACCOUNTANTS, CICA Handbook - Accounting, Vol. I, Toronto, CICA.
4 IAS 12 - Guide to International Financial Reporting Standards in Canada: IAS 12 Income Taxes