Capital Tax - Implications of Rollovers and Other Corporate Reorganizations

Bulletin 3019
Published: October 2001
Content last reviewed: November 2010
ISBN: 0-7794-2163-9 (PDF)

Publication Archived

Notice to the reader: Capital Tax was fully eliminated on July 1, 2010. It was eliminated effective January 1, 2007 for Ontario corporations primarily engaged in manufacturing or resource activities.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.

References: clauses 62(7)(b) & 62(7)(c)

Application

The bulletin replaces Interpretation Bulletin 2619, originally published April 1985 and is updated for current legislative references and for information contained in former Interpretation Bulletin L-16.

The bulletin sets out the policy of the Corporations Tax Branch (Branch) regarding the capital tax implications of rollovers. It is provided as a guide to taxpayers and is not intended as a substitute for the legislation. Any references to legislation are to the provisions of the Corporations Tax Act (Ontario) (CTA) and its Regulations, unless otherwise noted.

Asset Transfers - Rollovers

Introduction

  1. The Income Tax Act (Canada) (ITA) contains provisions to permit a deferral of income tax in certain asset transfers (i.e. "rollovers"). The tax effect of the transaction on the transferor is deferred and assumed by the transferee. This bulletin deals with the capital tax, as distinguished from the income tax, implications of assets being transferred (rolled over) to a corporation.
  2. Ontario is generally tied-in with the federal rollover rules for income tax purposes. Subject to the inter-provincial anti-avoidance provisions in sections 5.1, 29.1 and 31.1, a taxpayer may elect a different amount than that used for federal purposes within the rollover rules, to achieve a deferral of Ontario income tax. There is no corresponding capital tax provision to permit a deferral of Ontario capital tax or the transfer of a transferor's capital tax position to the transferee.

Section 85 ITA Rollovers - Property Transferred to a Corporation

  1. Section 85 of the ITA provides special rules that establish the tax values of assets that are transferred to a taxable Canadian corporation by an individual, a partnership or a corporation. A joint election is made by the transferor and the corporation. Consideration for the assets transferred must include shares in the corporation. The value of the shares as shown on the balance sheet is included in paid-up capital. There is no provision within the CTA to reduce this amount for capital tax purposes where the value of the assets received as consideration for the shares issued differs for tax and book purposes.

Different Depreciation Booked and Capital Cost Allowance Claimed - Clauses 62(7)(b) and (c)

  1. A corporation is required to include in paid-up capital any amount by which the value of an asset has been written down and deducted from income or retained earnings if that amount is not deductible or has not been deducted in computing income for tax purposes. Accordingly, the excess of accumulated depreciation booked over accumulated capital cost allowance (CCA) claimed for income tax purposes must be included in computing paid-up capital. Conversely, by administrative concession, the excess of accumulated CCA claimed over accumulated depreciation booked is deducted in computing paid-up capital. Further information on this subject is contained in Interpretation Bulletin 3012.
  2. A similar adjustment to paid-up capital may apply where depreciable property is rolled over to a corporation under section 85 of the ITA, but only in so far as the amounts are deducted by the transferee corporation itself. No adjustment should be made for the difference in accumulated depreciation and accumulated CCA deducted by the transferor. The reason for this is that surplus has not been transferred to the transferee corporation and an adjustment to restore surplus to a tax position is not necessary. The amount relevant for the capital tax adjustment is the actual CCA deducted by the transferee corporation and not any CCA deemed to have been claimed for income tax purposes.

Deemed Depreciation Adjustment

  1. Where the transferee corporation records the asset in its financial statements at a value greater than the amount jointly elected under section 85 of the ITA or subsection 29. (4), whichever applies, (for example, the undepreciated capital cost (UCC) to the transferor), the difference is not deductible from paid-up capital. However, as an administrative concession, the transferee corporation is allowed to amortize the difference between the financial statement value and the elected amount for income tax purposes at the effective rate used to claim CCA.
  2. The effective rate is determined as follows:

    (CCA claimed for the year on the CCA class) / (UCC before CCA claim on the CCA class)

    This applies to reduce paid-up capital for capital tax purposes only. Based on the ratio above, where no CCA is claimed for income tax purposes, no depreciation adjustment is allowed for capital tax purposes. The adjustment is calculated on a cumulative annual basis for each class of assets where there is a difference between the financial statement value and the elected amount for income tax purposes.

Numeric Example

  1. For example, a building having a fair market value (FMV) of $250,000 was rolled over on December 31, 1999 at an 'elected amount' of $100,000, being equal to its UCC at this date. The difference of $150,000 between the FMV and the elected amount (i.e., $250,000 - $100,000) may be "depreciated" for capital tax purposes as follows, (10% diminishing rate of CCA assumed):

    Year Difference Between FMV And 'Elected' Amount CCA Rate Applicable To The Asset Acquired Depreciation Amount Cumulative Depreciation Amount
    1 $150,000 10 % $15,000 $15,000
    2 $135,000 10 % $13,500 $28,500
    3 $121,500 10 % $12,150 $40,650

    The cumulative depreciation amount may be deducted from paid-up capital as shown above (i.e., 1st year deduction $15,000, 2nd year deduction $28,500, third year deduction $40,650 and so on).

Eligible Capital Expenditures

  1. The same concession also applies to eligible capital expenditures (ECE) which are being written-off for income tax purposes. In such cases, the transferee corporation may amortize the difference between three-quarters of the amount booked and the amount elected for income tax purposes at the effective rate used for claiming the deduction for cumulative eligible capital (not exceeding 7%), on a cumulative basis. Where no amortization of ECE is claimed for income tax purposes, no deprecation adjustment is allowed for capital tax purposes.

Corporate Reorganization

Section 87 and 88 ITA Rollovers - Amalgamation and Winding-up of a Subsidiary

  1. Assets may also be rolled over to a new corporation created as a result of an amalgamation (section 87 of the ITA) or to a parent corporation following winding-up of a subsidiary (section 88 of the ITA). In such situations the acquiring corporation may report the assets at a higher value or at the book value of the predecessors or subsidiary, as the case may be.

Assets Transferred at Values Higher than Previous Book Values

  1. Where the transferee corporation reports the assets at a value higher than the predecessors/ subsidiary's book values, that higher value is recognized for capital tax purposes. In such cases, the transferee corporation is allowed a concession in the same manner as the concession for section 85 rollovers.

Assets Transferred at SameValues as Previous Book Values

  1. Where assets are transferred at the predecessors/subsidiary's book values to the transferee corporation, these same values are recognized for capital tax purposes. In such cases, the concession is not needed by the new/parent corporation.

Surplus Adjustments Brought Forward

  1. Under these corporate reorganization transactions, the surpluses (retained earnings) of the predecessor/subsidiary corporations may be transferred to the continuing corporation. In such cases, surplus adjustments of the predecessor/subsidiary corporations should be carried forward to the new/parent corporation for purposes of adjusting its paid-up capital.

Section 97 ITA - Contribution of Property to a Partnership

  1. Assets transferred to a partnership may be reported for financial statement purposes by the partnership at a value higher than the elected tax value. In such situations, the foregoing principles should be used to determine if the concession will apply.

Effect of the Push- Down Accounting Technique on Capital Tax

  1. When the push-down accounting technique is used to revalue the assets and liabilities of the "acquired" corporation, there is a consequential adjustment to the shareholders equity of the "acquired" corporation; usually a credit balance. This surplus is required to be included in the "acquired" corporation's paid-up capital for capital tax purposes.
  2. The deemed depreciation adjustment is available to corporations which, as a result of push-down accounting, have increased the value of their depreciable assets. The corporation is allowed to amortize the difference between the revised book value (up to FMV) and the tax value at the effective rate used to claim CCA or to amortize cumulative eligible capital on a cumulative basis.
 
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