Subsection 123.4(1)
Full Rate Taxable Income
Administrative Policy
2 February 2017 Quebec CPA Individual Taxation Roundtable Q. 1.1, 2016-0674221C6 F - General deduction from tax - 123.4
A Québec Canadian-controlled private corporation that did not benefit from the applicable Québec small business deduction could benefit from not receiving the SBD at the federal level. Although the combined corporate tax rate would rise from 22.3% to 26.9%, a benefit from not accessing the federal SBD would result from the fact that all its active business income could be distributed as eligible dividends. Where a CCPC determines not to deduct the SBD to which it is entitled in computing its federal tax, will its general deduction from tax under s. 123.4(2) thereby increase? In responding negatively, CRA stated:
[A] CCPC may choose not to deduct an amount as a SBD, but the least of the amounts determined under paragraphs 125 (1) (a) to (c) would nevertheless reduce taxable income in the computation of its "full rate taxable income" used in the calculation of the GDT under subsection 123.4(2).
Paragraph (b)
Administrative Policy
2 June 2022 External T.I. 2019-0828381E5 - Tax Rate on Rental Income in Excess of SBD
Opco, which is a CCPC that has exceeded the $15 million “taxable capital employed in Canada” threshold such that the small business deduction is unavailable, employs more than 5 full-time employees in its sole business (the “Business”), which is the rental in Canada of real property. CRA stated:
As the Business has more than 5 full-time employees throughout its tax year, it is not a specified investment business and Opco’s income is from an active business. If all of Opco’s property is used for the purpose of gaining or producing income from the active business, no amount is deducted from Opco’s taxable income in respect of [aggregate investment income] AII and all of its taxable income is full rate taxable income subject to federal tax at rate of 15%.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 129 - Subsection 129(4) - Aggregate Investment Income | rental income of CCPC from non-specified investment business rental property is not AII | 132 |
7 October 2021 APFF Financial Strategies and Instruments Roundtable Q. 4, 2021-0895991C6 F - Déduction pour don de bienfaisance corporatif
Where a corporation realizes both business income and a capital gain in the year in which it makes a gift, the mechanism for calculating the corporation's tax liability for that year under s. 123.4 results in the gift not reducing the tax payable on the taxable capital gain, which is taxed at a higher rate. Could CRA allow the donation deduction from the taxable capital gain realized on the sale of a business where the donation occurs in the same year as the sale and business income is also realized in the same year? After noting that the s. 123.4(2) deduction is determined by applying the general rate reduction percentage for the year to the corporation’s “full rate taxable income” for the year, CRA stated:
Where a corporation is a CCPC, full rate taxable income is determined under paragraph (b) of that definition … [and] is its taxable income subject to tax under subsection 123(1) reduced by, inter alia, its aggregate investment income as defined in subsection 129(4).
Aggregate investment income includes, inter alia, the eligible portion of taxable capital gains.
There is no provision … that allows a charitable deduction to be taken into account in computing a corporation's aggregate investment income
Subparagraph (b)(iii)
See Also
DAC Investment Holdings Inc. v. The King, 2024 TCC 63
With a view to its imminent disposition of the shares of a subsidiary, the taxpayer continued to the British Virgin Islands, with the result that it ceased to be a Canadian-controlled private corporation (CCPC) and became a private corporation that was not a CCPC (its central management and control remained in Canada). CRA assessed on the basis inter alia that the resulting non-application of s. 123.4 (denying the general rate reduction on aggregate investment income) was an abuse of that provision.
After indicating that the absence of a rate reduction under s. 123.4 for aggregate investment income reflected that it was subject to a low rate of tax once distributed as dividends, D’Arcy J noted that there was no abuse regarding the s. 123.4 rate reduction, since the rate reduction it enjoyed for its taxable capital gain reflected the unavailability of a dividend refund (which, when received, reduced the net corporate tax rate to 8% of such aggregate investment income). He stated (at para. 146):
[T]he text indicates that the intention was not to apply the General Rate Reduction to income that was taxed at a rate that was lower than the General Tax Rate of 28% (the 38% general corporate tax rate minus the 10% abatement), such as the income of a CCPC that is either investment income or income that is eligible for the small business deduction or the income of a corporation that is eligible for the manufacturing and processing profit credit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | no abuse in avoiding CCPC status by continuing to BVI | 406 |
| Tax Topics - Income Tax Act - Section 123.3 | object of s. 123.3 was to impose refundable tax only on CCPCs | 214 |
| Tax Topics - Income Tax Act - Section 250 - Subsection 250(5.1) | rationale of s. 250(5.1) is to equate the place of continuance of a corporation with its place of incorporation | 205 |