Income Tax Act: 110.1 (6)

(This is a translation from the French document)

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.

Please note that this document, although correct at the time of release, may not represent the current position of the CRA.

MAIN 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 adopted: 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: Law; the Act

ROUND TABLE ON 11 OCTOBER FEDERAL TAXATION 2013 APFF – 2013 CONFERENCE

Issue 25

Consequence of a tax asset future on the qualification of a “qualified small business share” and a “small business corporation”.

Under 2000-001582 technical interpretations (footnote 1) and 2008-028530 (footnote 2), the CRA mentions that a tax asset future presented in the balance sheet of a company constitutes an element of assets for the purposes of the definition of «qualified small business share» («QSBCS”) in subsection 110.6(1) (1) L.I.R and the definition of a “small business corporation”(‘SBC’) in subsection 248 (1) I.T.A. However, the CRA mentions that such future tax asset does not constitute assets ‘used’ in a company that operates actively for the purposes of the definitions mentioned above.

CRA question

Can the CRA confirm that the future tax asset is an asset used in the active exploitation of a business for the purposes of the definition of QSBCS in subsection 110.6(1) (1) law and the definition of a subsection 248 (1) I.T.A. SBC

Response of the ARC

According to section 3465 (footnote 3), “the future income tax assets mean the amounts of savings income taxes resulting from temporary differences deductible carry-forwards in front of unused tax losses and carry forwards in front of unused tax cuts, except for investment tax credits.”

According to IAS 12 (footnote 4), “deferred tax assets are deductible temporary differences, the reports forward of unused tax losses and the reports ahead of tax credits not used.”

Despite the differences in terminology between CICA 3465 and standard IAS 12, the CRA considers that there is no significant difference between the terms “deferred tax assets” and “deferred tax assets” for the purposes of the definitions mentioned above.

In short, to determine whether an action is a QSBCS, should take into account, inter alia, the fair market value of the assets attributable to components used primarily in a business that the company or company related actively exploits. It is also to determine whether a company is a SBC.

The CRA is of the opinion that a future tax asset is not active for the purposes of the definition of QSBCS and the definition of SBC. Therefore, do not take account of the future tax asset in determining whether an action is a QSBCS or whether a company is a SBC.

Furthermore, when a future tax asset becomes a tax receivables, this tax must be regarded as an asset to determine whether an action is a QSBCS or whether a company is a SBC. Tax receivables can be a part of assets used in the active exploitation of a business for the purposes of the definition of QSBCS and the definition of SBC if tax receivables results from the active exploitation of a business. For example, the CRA is of the opinion that an amount of tax receivable following the carryback of a loss from an active business is an asset used mainly in the business that the company operates actively for the purposes of the two definitions.

This interpretation on the assets future tax represents a change of position with respect to the answer given to question 29 we raised in the context of the Roundtable on federal taxation annual Conference 2008 of the Fiscal and financial planning Association. Similarly, the position set out in the 2000-001582 interpretation represents the opinion of the CRA.

The same interpretation applies to the deferred tax assets.

FOOTNOTES

Because our systems requirements, footnotes contained in the original document are reproduced below:

1 the technical Interpretation 2000-001582 CANADA Revenue Agency, October 2, 2000.

2 the technical Interpretation 2008-028530 CANADA Revenue Agency, October 10, 2008.

3 “income taxes”, in Canadian Institute of Chartered Accountants, CICA Accounting, vol. I, Toronto, CICA Handbook.

4 international standard of financial reporting IAS 12, “income taxes”.