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: 1. Whether the "taxable income" and the "taxable capital employed in Canada" of a parent corporation and its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they amalgamated can be taken into account under paragraphs 157(1.3)(b) and 157(1.4)(b) in determining whether the amalgamated entity qualifies as a small-CCPC for the particular taxation year? 2. Whether the "taxable income" and the "taxable capital employed in Canada" of a parent corporation and its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up can be taken into account under paragraphs 157(1.3)(b) and 157(1.4)(b) in determining whether the parent corporation qualifies as a small-CCPC for the particular taxation year?
Position: 1. No. 2. Yes. The taxable income and the taxable capital employed in Canada of the parent corporation and its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up taxation must be taken into account pursuant to paragraphs 157(1.3)(b) and 157(1.4)(b)
Reasons: 1. The amalgamated entity is deemed to be a new corporation, and the predecessor corporations are deemed to have ceased to exist further to their amalgamation pursuant to paragraph 87(2)(a). 2. The parent corporation remained in existence after the wind-up. The parent corporation was associated with its wholly-owned subsidiary for the taxation year that ended immediately before the taxation year in which they wound-up.
February 25, 2011
Mr. Denis Chartrand Income Tax Rulings
Program Officer François Mathieu
Ottawa TSO, Assessing Section (613) 957-2746
750 Heron Road
Ottawa ON K1A 0L5
2008-027756
Request for a technical interpretation
Small-CCPC determination under subsection 157(1.2)
We are writing in response to your electronic message of May 5, 2008 in which you requested our views on the application of subsection 157(1.2) of the Income Tax Act after the amalgamation of the subsidiary with the parent corporation or alternatively after the winding-up of a subsidiary into its parent corporation. We apologize for the delay in responding to your request.
Unless otherwise stated, all statutory references in this letter are references to the provisions of the Income Tax Act.
Facts
For clarification purposes, we have assumed the following facts:
1. Prior to December 31, 2009, Corporation B was a wholly-owned subsidiary of Corporation A.
2. The taxation year of both corporations ended on December 31.
3. Corporation B's "taxable income" was $125,000 for its 2009 taxation year.
4. Corporation B's "taxable capital employed in Canada" was $3,500,000 for its 2009 taxation year.
5. Corporation A's "taxable income" was $275,000 for its 2009 taxation year.
6. Corporation A's "taxable capital employed in Canada" was $6,000,000 for its 2009 taxation year.
7. On December 31, 2009, Corporation B was either amalgamated or wound-up with Corporation A.
8. Corporation A and Corporation B were associated prior to the amalgamation or the wind-up.
9. Corporation A and Corporation B were not associated with any other corporation at the time of the amalgamation or the wind-up.
10. In the event of an amalgamation, the corporation formed as a result of that amalgamation ("amalgamated entity") would also have a December 31 taxation year-end.
11. The "taxable income" of the amalgamated entity or, in the case of a wind-up, of Corporation A is equal to $600,000 for its 2010 taxation year.
12. The "taxable capital employed in Canada" of the amalgamated entity or, in the case of a wind-up, of Corporation A is equal to $9,975,000 for its 2010 taxation year.
13. The amalgamated entity or, in the case of a wind-up, of Corporation A is not associated with another corporation for its 2010 taxation year.
Issue
Whether the "taxable income" and the "taxable capital employed in Canada" of Corporation A and Corporation B for their 2009 taxation year can be taken into account in determining whether the amalgamated entity or, in the case of a wind-up, of Corporation A is a small-CCPC in respect of its 2010 taxation year?
Law
Unless otherwise provided, every corporation shall pay monthly instalments to the Receiver General pursuant to subsection 157(1), which are computed in accordance with section 5301 of the Income Tax Regulations ("Regulations").
However, subsection 157(1.1) provides that a "small-CCPC", as defined in subsection 157(1.2), may pay quarterly instalments.
Pursuant to subsection 157(1.2), a Canadian-controlled private corporation ("CCPC") qualifies as a "small-CCPC" at a particular time during a taxation year if, among others, the following requirements are satisfied (footnote 1) :
- The amount determined under subsection 157(1.3) for the taxation year or for the preceding taxation does not exceed $500,000, and
- The amount determined under subsection 157(1.4) for the taxation year or for the preceding taxation does not exceed $10,000,000.
Subsections 157(1.3) and (1.4) respectively provide that the "taxable income" earned, and the "taxable capital employed in Canada" (within the meaning assigned by section 181.2) by a corporation where it is associated with another corporation in a particular taxation year is equal to the total of all amounts each of which is: (i) the "taxable income" earned, and the "taxable capital employed in Canada" by the corporation for the particular taxation year, and (ii) the "taxable income" earned, and "the taxable capital employed in Canada" by a corporation with which it is associated in the particular taxation year where the taxation year of that corporation ends in the particular taxation year.
Our views
The amalgamated entity or, in the case of a wind-up, of Corporation A, would not qualify as a small-CCPC because the taxable income it earned in its 2010 taxation year exceeds $500,000.
However, the amalgamated entity or, in the case of a wind-up, Corporation A, may still qualify as a small-CCPC if its established that: (i) the total of all amounts each of which is the taxable income it earned in its 2009 taxation year, and the taxable income any corporation with which it was associated earned in its 2009 taxation year does not exceed $500,000, and (ii) the total of all amounts each of which is its taxable capital employed in Canada in its 2009 taxation year, and the taxable capital employed in Canada any corporation with which it was associated in its 2009 taxation year does not exceed $10,000,000.
Amalgamation of Corporation A and Corporation B
In CGU Holdings Canada Ltd. v. Queen 2009 DTC 5044 (FCA), the Court held that there is no reason to restrict the application of the new corporation rule set out in paragraph 87(2)(a) to the computation of income and taxable income as was suggested in the case of Pan Ocean Oil Ltd. v. Queen 94 DTC 6412 (FCA) (footnote 2) . Therefore, a corporation formed as a result of an amalgamation of two or more predecessor corporations described in paragraph 87(2)(a) shall be deemed to be a new corporation, and the predecessor corporations having amalgamated shall be deemed to have ceased to exist for all purposes of the Act (including Division I) unless the tax attributes of the predecessor corporations are continued into the amalgamated entity for the specific purposes listed in subsection 87(2).
For the purpose of computing the investment tax credit, and the refundable tax credit to be claimed by the amalgamated entity, paragraphs 87(2)(oo) and (oo.1) specifically provide that the taxable income of the amalgamated entity shall be equal to the total of all amount each of which is the taxable income of each predecessor corporation. Paragraph 5301(4)(a) of the Regulations similarly provides that the "first instalment base" of an amalgamated entity shall be equal to the total of all amounts each of which is the "first instalment base" of a predecessor corporation for its last taxation year.
There is no similar "look back rule" in the Income Tax Act requiring that the taxable income of each predecessor corporation be taken into account for the purpose of determining whether a corporation resulting from an amalgamation qualifies as a small-CCPC. Given that Corporation A and Corporation B are deemed to have ceased their corporate existence upon their amalgamation pursuant to paragraph 87(2)(a), we believe that the taxable income and the taxable capital employed in Canada for their 2009 taxation year should not be taken into account for the purpose of paragraphs 157(1.3)(b) and 157(1.4)(b) in determining whether the amalgamated entity qualifies as a small-CCPC in respect of its 2010 taxation year.
Winding-up of the wholly-owned subsidiary into its parent corporation
If Corporation B is wound-up into Corporation A on December 31, 2009, Corporation A would continue its existence in subsequent taxation years.
Prior to the wind-up, Corporation A controlled Corporation B, and, therefore, was associated to that corporation.
Paragraphs 157(1.3)(b) and 157(1.4)(b) apply in determining whether Corporation A qualifies as a small-CCPC for its 2010 taxation year. The total amounts each of which is the taxable income of Corporation A and Corporation B in respect of their 2009 taxation years is equal to $400,000, which is less than the $500,000 threshold stated in paragraph 157(1.2)(a). The total amounts each of which is the taxable capital employed in Canada of Corporation A and Corporation B in respect of their 2009 taxation years is equal to $9,500,000, which is less than the $10,000,000 threshold stated in paragraph 157(1.2)(b).
Assuming that the other requirements stated in subsection 157(1.2) are satisfied, Corporation A would qualify as a small-CCPC for its 2010 taxation year.
We trust that our comments will be of assistance.
Yours truly,
Yves Moreno
Manager
Corporate Reorganizations Section I
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 The other requirements are found in paragraphs 157(1.2)(c) and (d)
2 CGU Holdings Canada Ltd. v. Queen 2009 DTC 5044 (FCA) at paragraphs 25, 40-42
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