25 March 2009 External T.I. 2009-0306941E5 - Ontario Taxation Act - Transitional Tax Dr.& Cr.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether certain exploration and development pools are included in the definition of "total federal balance" and "total Ontario balance" for the purposes of the transitional tax debit and credit.

Position: Generally no.

Reasons: Definition of "total federal balance" and "total Ontario balance" exclude the particular pools.

XXXXXXXXXX

Attention: XXXXXXXXXX

March 25, 2009

Dear Sirs,

Re: Technical Interpretation Request: Certain sections of the Taxation Act, 2007 (Ontario)

I am replying to your letter dated December 11, 2008, received by email on January 20, 2009, in which you requested a technical interpretation in respect of certain sections of the Taxation Act, 2007 (Ontario).

Specifically, you have requested that we confirm the following:

1) The following tax balances as defined under the Income Tax Act (Canada) (ITA) are not included in the total federal balance and the total Ontario balance as defined in subsections 48(4) and 48(6) of the Taxation Act, 2007 (Ontario) (TA) respectively.

• Foreign exploration and development expenses as defined under subsection 66(15) of the ITA,
• Successor of foreign exploration and development expenses as defined under section 66.7(2) of the ITA,
• Cumulative foreign resource expenses as defined under section 66.21(1) of the ITA,
• Successor of foreign resource expenses as defined under subsection 66.7(2.3) of the ITA
• Successor of Canadian exploration expense as defined under subsection 66.7(3) of the ITA
• Successor of Canadian development expense as defined under subsection 66.7(4) of the ITA
• Successor of Canadian oil and gas property expense as defined under subsection 66.7(5) of the ITA

2) To the extent that the above balances differ for federal and Ontario purposes at the "transition time" as defined by subsection 46(1) of the TA, no transitional tax debit or credit will arise pursuant to subsection 48(1) or 50(1) of the TA.

3) For taxation years ending after December 31, 2008, taxpayers will generally be allowed to deduct unclaimed amounts in respect of the above balances in computing taxable income for both federal and Ontario purposes.

4) The available deductions for both federal and Ontario purposes will be equal to the balances of these expenditures at the "transition time".

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following comments.

Our Comments

Pursuant to subsection 1(1) and 26(1) of the TA, where a taxation year ends after December 31, 2008, the Ontario taxable income is equal to the federal taxable income multiplied by the Ontario allocation percentage. As a result, federal pool balances are used in determining Ontario taxable income for a taxation year ending after 2008. In other words, where an amount is claimed for federal purposes, the same amount is effectively claimed for Ontario purposes. The previous Ontario treatment of the expenditures that existed for taxation years ending on or before December 31, 2008 are no longer relevant in determining Ontario taxable income.

Sections 46 to 52 of the TA provide the computation of the transitional tax debits and credits and are designed to offset any benefit or hardship that a corporation may face on the adoption of the federal tax pools.

Under subsection 47(1) of the TA, a specified corporation is generally required to pay additional Ontario corporate income tax over a five year period to reflect the extent to which its "total federal balance" exceeds its "total Ontario balance" at the beginning of its first taxation year ending after 2008. Conversely, subsection 47(7) provides that a specified corporation is generally entitled to a transitional tax credit over a five year period to reflect the extent to which its "total Ontario balance" exceeds its "total federal balance".

A corporation's "total federal balance" is computed under subsection 48(4) of the TA and is largely comprised of the federal tax pools. A corporation's "total Ontario balance" is computed under subsection 48(6) of the TA and is largely comprised of a corporation's Ontario tax pools. These tax pools are determined at the beginning of the first taxation year that includes the start of 2009.

As the pools included in the "total federal balance" and "total Ontario balance" are not comprehensive, an anti-avoidance measure is included in the computation of the total federal balance. Variable "S" includes an amount equal to the difference of the amount claimed in respect of a federal tax pool and an Ontario tax pool where the pools, other than a reserve, are not otherwise included in the total federal balance and total Ontario federal balance. The difference included in the total federal balance is limited to the difference in the amount claimed for taxation years ending on or after December 13, 2006 and before 2009 where the amount claimed for Ontario tax purposes exceeded the amount claimed for federal tax purposes.

With respect to your specific questions, I confirm the following:

• None of the pools listed above are included in the calculation of "total federal balance" and "total Ontario balance" pursuant to subsection 48(4) and 48(6) of the TA.
• As the pools listed above are not included in the computation of "total federal balance" and "total Ontario balance" the different balances are ignored for purposes of the transitional tax debit and credit with the exception of variable "S" in the computation of "total federal balance". As explained above, variable "S" will include the difference in the amount claimed for federal and Ontario purposes where the amount claimed for federal purposes is less than the amount claimed for Ontario purposes for taxation years ending on or after December 13, 2006 and before 2009. Variable "S" would only be applicable in respect of the pools listed in the last three bullet points since Ontario did not pool the expenditures in respect of foreign resource property but instead added the expenditures to the adjusted cost base of the foreign resource property.
• "Transition time" is a term used only in respect of the transitional tax debit and credit provisions. Since the above pools are not otherwise part of the transitional tax debit and credit calculation they do not have a "transition time" for purposes of the transitional tax debit and credit calculation.
• For taxation years ending after December 31, 2008 Ontario taxable income is harmonized with federal taxable income. The amount claimed in respect of the above balances for federal and Ontario purposes will be the same and are based on the federal pool balances at the beginning of a corporation's first taxation year ending after 2008.

For greater certainty, our comments are only in respect of the Taxation Act, 2007 (Ontario).

I trust the above answers your questions.

Yours truly,

Nerill Thomas-Wilkinson, CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch