Explanatory Notes on Calculation of Transitional Tax Debits and Credits for Ontario Corporations

Bulletin 4011
Published: December 2008
Content last reviewed: September 2009
ISBN: 978-1-4249-8437-4 (PDF), 978-1-4249-8436-7 (HTML)

PDF Version [ 46 KB / 1 page | Download Adobe Reader ]

The Taxation Act, 2007, Chapter 11, Statutes of Ontario, 2007, was enacted in June 2007.

The legislation enables Ontario's corporate income tax, minimum tax, capital tax and special additional tax for life insurers to be administered by the Canada Revenue Agency for taxation years ending after 2008. It largely replaces the Corporations Tax Act (Ontario) and the Income Tax Act (Ontario) for those taxation years.

A large portion of the Taxation Act, 2007 is substantially similar to the Corporations Tax Act (Ontario) and the Income Tax Act (Ontario). However, Subdivision d of Division B of Part III of the Taxation Act, 2007 provides important new rules under which transitional tax credits and tax debits are calculated for Ontario corporations. These transitional tax credits and tax debits are designed to provide an appropriate transition from the Corporations Tax Act (Ontario) for corporations with different income tax attributes for federal and Ontario purposes.

The explanatory notes regarding the transitional provisions are included below.


APPENDIX A
Explanatory Notes On Calculation Of Transitional Tax Debits And Credits For Ontario Corporations

Table of Contents

Part 1. Overview

For taxation years ending before 2009, a corporation's income and taxable income for Ontario purposes are determined under the Corporations Tax Act (Ontario) (the "CTA"). These amounts are determined with reference to Ontario tax pools (e.g., the undepreciated capital cost of depreciable property). The rules governing these Ontario tax pools differ, to some extent, from the rules under the Income Tax Act (Canada) (the "Federal Act"). In addition, corporations may typically choose the extent to which these pools are claimed. As a result of both factors, Ontario tax pools can be materially higher or lower than the corresponding federal tax pools.

For taxation years ending after 2008, the Taxation Act, 2007 (the "New Act") enables the administration of Ontario's corporate income tax by the Canada Revenue Agency ("CRA"). Consistent with the requirements for CRA administration, a corporation's income and taxable income for Ontario purposes under the New Act are, subject only to the potential application of the general anti-avoidance rule in section 110 of the New Act, identical to income and taxable income determined under the Federal Act. The effect of this change is that federal tax pools are adopted for Ontario purposes as of the beginning of a corporation's first taxation year ending after 2008.

Without taking into account the transitional rules in sections 46 to 52 of the New Act, this change would benefit a corporation with federal tax pools exceeding Ontario tax pools, since the excess could effectively be deducted a second time for Ontario purposes. Conversely, corporations with lower federal tax pools than Ontario tax pools would face a hardship due to a permanent loss of Ontario tax deductions.

Sections 46 to 52 of the New Act govern the computation of Ontario transitional tax credits and debits and are designed to offset the benefits and hardships described above.

Under subsection 47(1) of the New Act, 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 as of the beginning of its first taxation year ending after 2008 exceeds its total Ontario balance. A corporation's "total federal balance" largely comprises the corporation's total federal tax pools that are described in subsection 48(4). Similarly, a corporation's "total Ontario balance" largely comprises its total Ontario tax pools described in subsection 48(6).

Under subsection 46(5) of the New Act, a specified corporation is a corporation with a permanent establishment in Ontario at the beginning of its taxation year that includes the start of 2009, where the corporation has at least one preceding taxation year and certain other conditions are met1. As a consequence, a specified corporation is generally one that is subject to tax under the New Act for its taxation year ending in 2009 and was subject to tax under the CTA for its immediately preceding taxation year ending in 2008.

If a specified corporation's total federal balance exceeds its total Ontario balance as of its transition time (normally the beginning of its taxation year that includes the start of 2009), its transitional tax debit for each of its 2009 to 2013 taxation years would generally be equal to one-fifth of the product of:

  • the excess described,
  • its Ontario allocation factor for the taxation year, and
  • the basic rate of Ontario corporate income tax that applies to the taxation year.2

Under subsection 1(1) of the New Act, a corporation's Ontario allocation factor is the percentage representing the portion of the corporation's taxable income that is allocated to Ontario under the allocation rules in Part IV of the regulations to the Federal Act. In the event that a corporation's taxable income is nil, the Ontario allocation factor is computed using a hypothetical taxable income of $1,000.

Example 1

Corporation A uses calendar years as its taxation years. Its Ontario allocation factor at all relevant times is one. Its total federal balance as of January 1, 2009 is $100,000. Its total Ontario balance as of that date is $70,000. What are the tax consequences of the transitional tax credit/debit regime to Corporation A, assuming it is a specified corporation and the basic rate of tax for corporations does not change?

Analysis
  1. Corporation A will have transitional tax debits for each of its 2009 to 2013 taxation years because its total federal balance exceeds its total Ontario balance as of January 1, 2009. The transitional tax debits offset the reduction in Ontario tax arising from being able to deduct excess federal tax attributes for Ontario purposes.
  2. Under subsection 48(1) of the New Act, the transitional tax debit per year will equal the amount determined by the formula:

    A/B × (C−D) × E

    in which "A" is 365 days, "B" is 1,825 days (i.e., 5 × 365), "C" is $100,000, "D" is $70,000 and "E" is 14%.
  3. This annual tax debit equals $840, meaning that its total income taxes would be increased beyond the level otherwise determined by $4,200 (=5 × $840) over five year.
  4. The transitional tax debits would generally be offset by tax reductions attributable to the corporation having lower taxable income over time, as a consequence of the use of "excess" federal tax attributes reflected in its total federal balance.

Conversely, under subsection 47(3) of the New Act, 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. The credit is not refundable, but unused credits can be carried forward within the five year period.

Where a corporation has sufficient Ontario corporate income tax otherwise determined, the calculation of the transitional tax credit parallels the calculation of the transitional tax debit. In this case, the transitional tax credit for a corporation for each of its first five taxation years ending after 2008 would generally be equal to one-fifth of the product of the "excess" Ontario balance, the corporation's Ontario allocation factor for the taxation year and the basic rate of Ontario corporate income tax for the taxation year.

Tax credits and debits are calculated with reference to the basic rate of Ontario income tax, which does not take into account the Ontario 5.5% corporate income tax rate for small businesses. However, because the amount of the small business deduction under the CTA has generally been based on federal taxable income and not Ontario taxable income, disregarding the 8.5% rate reduction is appropriate in policy terms. This is illustrated by Example 2.

Example 2

Corporation A, described in example 1 above, claims a small business deduction under section 31 of the New Act for its 2009 taxation year. The $30,000 difference between Corporation A's total Ontario balance and its total federal balance on January 1, 2009 is attributable to a capital cost allowance claimed for its 2008 taxation year for Ontario purposes but not for federal purposes. For its 2008 taxation year, Corporation A's taxable income for federal purposes is $200,000 and its taxable income for Ontario purposes is $170,000.

Analysis
  1. As under Example 1, Corporation A's transitional tax debits over 5 years are equal to $4,200.

  2. As per the table below, Corporation A's tax saving for its 2008 taxation year from using the additional $30,000 deduction is also $4,200 (= $30,000 × 14%) because federal numbers were relevant to the calculation of Corporation A's Ontario small business deduction.

    2008 Ontario Income Tax Calculation3

      After $30,000
    deduction
    Before $30,000
    deduction
    federal taxable income $200,000 $200,000
    Ontario capital cost allowance $30,000 n/a
    Ontario taxable income $170,000 $200,000
    Ontario income tax before credits
    (14% of Ontario taxable income)
    $23,800 $28,000
    Ontario small business deduction
    (8.5% of federal taxable income)
    $17,000 $17,000
    Total Ontario income tax (A) $6,800 (B) $11,000
    DIFFERENCE between (A) and (B) = $4,200
  3. It is thus appropriate to calculate the transitional tax debit of $4,200 with reference to the Ontario basic rate of income tax in order to appropriately offset the Ontario tax benefit received by a small corporation before 2009.

    Assuming $200,000 in taxable income before capital cost allowance claims, all from an active business carried on exclusively in Ontario.

A corporation's total federal balance and total Ontario balance are normally determined as of the beginning of a specified corporation's first taxation year ending after 2008. However, there are special rules in section 51 of the New Act under which amounts in respect of these balances are transferred to successor corporations on a winding-up to which subsection 88(1) of the Federal Act applies or on an amalgamation or merger. In addition, section 52 of the New Act provides adjustments in connection with certain pre-2009 transactions involving non-arm's length corporations that have different taxation year ends (i.e., the transaction occurs at a time that is in a taxation year straddling December 31, 2008 of one corporation but in a taxation year ending before January 1, 2009 of the other).

The period, typically five years, for which the transitional tax credit or debit is calculated is referred to as a corporation's "amortization period", as determined under subsection 46(2) of the New Act. There are a number of circumstances in which the corporation's amortization period is shortened, leading to an acceleration of transitional tax debits for a corporation in a debit position. A shortened amortization period may also lead to an acceleration or reduction of transitional tax credits for a corporation in a credit position.

Special rules for corporations that engage in scientific research and experimental development ("SR & ED") are contained principally in section 49 of the New Act. These special rules apply if there is a federal SR & ED balance that has been the subject of an election under "I" of paragraph 1 of subsection 48(4). The general effect of these rules is to permit SR & ED corporations to defer the recognition of transitional tax debits.

In addition, to take into account the loss of the Ontario tax incentive that was provided under section 11.2 of the CTA, corporations that have earned federal investment tax credits ("federal ITCs") for taxation years ending before January 1, 2009 in respect of their Ontario SR & ED may generally increase their total Ontario balance to reflect the unclaimed portion of those credits.

There are a number of mechanisms in the New Act that can potentially be used to address unacceptable tax planning with regard to transitional tax credits and debits. Reference can be made in the note on subsection 46(2) describing transactions that have the effect of accelerating transitional tax debits and reducing transitional tax credits. In addition, in certain cases, "S" of paragraph 1 of subsection 48(4) would cause an increase in a transitional tax debit or a reduction of a transitional tax credit. The general anti-avoidance rule in section 110 would apply to address abusive tax planning.

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Part 2. Definitions and Rules of General Application

Taxation Act, 2007
46(1)
"adjusted basic rate"

A corporation's "adjusted basic rate" for a taxation year is equal to the product of the corporation's basic rate of tax for the year and the corporation's Ontario allocation factor for the year.

Under subsection 29(2) of the New Act, a corporation's basic rate of tax for a taxation year is 14%. Under subsection 1(1), a corporation's "Ontario allocation factor" is determined with reference to the federal allocation rules in Part IV of the regulations to the Federal Act. If a corporation carries on business only through one or more permanent establishments situated in Ontario, its Ontario allocation factor is one.

As further detailed in Parts 3 and 6 of the Explanatory Notes, a corporation's "adjusted basic rate" for a taxation year enters into the calculation of the corporation's transitional tax credits and debits for the year.

46(1)
"completion time"

The "completion time" in respect of a winding-up of a subsidiary corporation is the end of the subsidiary corporation's taxation year during which, for the purposes of paragraph 88(1)(e.2) of the Federal Act, its assets were distributed to its parent corporation on the winding-up. This definition is used mostly in section 51 of the New Act, under which continuation rules are provided for amalgamations and windings-up.

46(1)
"eligible amalgamation"
"new corporation"
"transition time"

Where an "eligible amalgamation" occurs, amounts in respect of the total federal balance and the total Ontario balance of a predecessor corporation are transferred to the corporation formed on the amalgamation (defined as the "new corporation"), to the extent provided by the rules in section 51 of the New Act.

An "eligible amalgamation" in respect of a predecessor corporation is an amalgamation or merger of the predecessor corporation with another corporation to form a new corporation where all of the following conditions are satisfied:

  • the amalgamation or merger occurs after December 31, 2008 and does not occur at the new corporation's transition time,
  • the new corporation has a permanent establishment in Ontario immediately after the amalgamation or merger,
  • the predecessor corporation has a permanent establishment in Ontario immediately before the amalgamation or merger,
  • the predecessor corporation was a specified corporation at its transition time or, by operation of subsection 51 (1) of the New Act, was a specified corporation at any time before the amalgamation or merger,
  • the amalgamation or merger occurs in the amortization period of the new corporation,
  • the amalgamation or merger would occur before the end of the amortization period of the predecessor corporation if the new corporation were considered to be a continuation of the predecessor corporation, and
  • the amortization period of the new corporation does not end immediately after the amalgamation or merger.

An amalgamation or merger that occurs at the new corporation's transition time is not an "eligible amalgamation" and is subject to the rules set out in paragraphs 1 and 2 of subsection 51(1) of the New Act (described below).

A corporation's "transition time" is generally the beginning of the corporation's taxation year that includes the start of 2009. If the taxation year of a corporation is deemed to end on December 31, 2008 by subsection 249(3) of the Federal Act, the "transition time" in respect of the corporation would be the beginning of the corporation's first taxation year that begins after December 31, 2008. Because of subsection 249(3) of the Federal Act, the corporation's taxation year that is deemed to end on December 31, 2008 will be governed by the CTA rather than by the New Act.

46(1)
"eligible post-2008 winding-up"

Where an "eligible post-2008 winding-up" occurs, amounts in respect of the total federal balance and the total Ontario balance of a subsidiary corporation are transferred to its parent corporation under the rules in section 51 of the New Act. Under subsection 26(1) of the New Act, "parent corporation" and "subsidiary corporation" are defined with reference to windings-up to which subsection 88(1) of the Federal Act applies.

An "eligible post-2008 winding-up" is a winding-up of a subsidiary corporation into its parent corporation that satisfies the following conditions:

  • the completion time (described above) of the winding-up is after December 31, 2008,
  • for the purposes of paragraph 88(1)(e.2) of the Federal Act, the parent corporation's taxation year during which it received the assets of the subsidiary corporation on the winding-up ended after December 31, 2008,
  • the subsidiary corporation has a permanent establishment in Ontario during its taxation year ending at the completion time,
  • the parent corporation has a permanent establishment in Ontario in the taxation year during which, for the purposes of paragraph 88(1)(e.2) of the Federal Act, it received the assets of the subsidiary corporation on the winding-up, and
  • the time immediately after the completion time of the winding-up is in the amortization period of the subsidiary corporation and in the amortization period of the parent corporation.

46(1)
"eligible pre-2009 winding-up"

Under paragraph 5 of subsection 46(5) of the New Act, a subsidiary corporation is exempt from the transitional tax credit and debit rules if it participates in an eligible pre-2009 winding-up. In addition, adjustments are provided under sections 51 and 52 in connection with eligible pre-2009 windings-up. These adjustments are described in Part 7 of the Explanatory Notes.

An "eligible pre-2009 winding-up" means, in respect of a subsidiary corporation, a winding-up of the subsidiary corporation where:

  • the completion time (described above) of the winding-up is after December 31, 2008 and, for the purposes of paragraph 88(1)(e.2) of the Federal Act, the parent corporation's taxation year during which it received the assets of the subsidiary on the winding-up ended before January 1, 2009, or
  • the completion time of the winding-up is before January 1, 2009 and, for the purposes of paragraph 88(1)(e.2) of the Federal Act, the parent corporation's taxation year during which it received the assets of the subsidiary corporation on the winding-up ended after December 31, 2008.

Under subsection 26(1) of the New Act, "subsidiary corporation" and "parent corporation" are defined with reference to windings-up under subsection 88(1) of the Federal Act.

46(1)
"federal SR & ED transitional balance"

See Part 4 of the Explanatory Notes.

46(1)
"reference period"

A corporation's "reference period" is the period that begins at the beginning of the corporation's first taxation year ending after 2008 and that ends either five calendar years later or, if earlier, the end of 2013. For a corporation with a taxation year that includes the start of 2009, the beginning of its reference period coincides with its transition time.

The expression "reference period" is used in the determination of a corporation's amortization period under subsection 46(2) of the New Act. A corporation's "amortization period" (described below) is generally the period during which transitional tax credits and debits are recognized. The expression is also relevant in the determination of a corporation's transitional tax credits and debits.

46(1)
"total federal balance"
"total Ontario balance"

See Parts 1 and 5 of the Explanatory Notes.

46(1)
"unused credit balance"

See Part 6 of the Explanatory Notes.

46(2)
Amortization period

A corporation's amortization period is determined under subsection 46(2) of the New Act. It is the period during which a corporation's transitional tax credits and debits are recognized. However, if the corporation is an SR & ED performer that makes an election under "I" of paragraph 1 of subsection 48(4), the corporation's amortization period does not affect the timing of the recognition of the transitional tax debits resulting from the election.

A corporation's amortization period starts at the beginning of its "reference period", as defined in subsection 46(1) of the New Act. It ends at the end of its "reference period" or, if earlier, at the later of the time immediately after the reference period began and the time immediately before the earliest of the following events:

  • the corporation ceases to have a permanent establishment in Ontario for any reason other than an "eligible amalgamation" or "eligible post-2008 winding-up" of the corporation,
  • the corporation becomes exempt from tax under Part I of the Federal Act,
  • as described in subclause 46(2)(b)(iv) of the New Act, the corporation is a party to a transaction or event if it may reasonably be considered that one of the main purposes of the transaction or event, or a series of transactions or events of which that transaction or event is a part, was to reduce or avoid the inclusion of a transitional tax debit or to increase a transitional tax credit, and
  • as described in subclause 46(2)(b)(v) of the New Act, the corporation or another corporation that is a designated corporation with respect to it4 was a party at any time before the beginning of the corporation's reference period to a transaction or event and it may reasonably be considered that one of the main purposes of the transaction or event, or a series of transactions or events of which that transaction or event was a part, was to reduce or avoid the inclusion of a transitional tax debit or to increase a transitional tax credit.

As described further below, a corporation's amortization period may also be shortened:

  • in circumstances set out in subsection 46(3) of the New Act, where the Ontario Minister permits an acceleration of the corporation's transitional tax credits, and
  • as a consequence of an election by the corporation under subsection 47(2) to pre-pay transitional tax debits.

The anti-avoidance rules in subclauses 46(2)(b)(iv) and (v) of the New Act are intended to apply in cases where a corporation seeks to maximize or minimize the effect of the transitional tax credit/debit rules. These cases may involve corporate reorganizations affecting the Ontario allocation factor.

For example, with reference to subclause 46(2)(b)(iv) of the New Act, a corporation might have a major presence in Ontario (e.g., a consistent 0.9 Ontario allocation factor) and determine that its total federal balance at its transition time exceeds its total Ontario balance. If the corporation were to transfer a major part of its Ontario assets in 2010, the transferor would generally reduce its transitional tax debits by reason of the reduction of its Ontario allocation factor. However, for the same reason, the transfer would also be expected to reduce the transferor's Ontario tax benefit from having higher federal tax attributes than Ontario tax attributes. In many cases, the tax benefits and costs to the transferor corporation would offset and the transaction would not be objectionable.

However, in some cases, a transferor corporation would benefit before the transfer from having higher federal tax attributes that could be used up more quickly than under the normal five-year amortization schedule for transitional tax debits. In other cases,

  • a transferor corporation's tax benefit from using federal tax attributes rather than Ontario tax attributes might be less than the transitional tax debits to which it was subject, or
  • the transaction may have been driven by access by the transferee to the higher federal tax attributes without the transferee being subject to offsetting effects (e.g., such as higher transitional tax debits resulting from the transfer).

In order to discourage tax-driven transactions designed to decrease a corporation's Ontario transitional tax debits, if one of the main purposes of a transaction or event (taking into account all the effects of the transaction or event) is to reduce the corporation's transitional tax debits, the corporation's amortization period would end as a consequence. The result of this is that a corporation's transitional tax debits would be accelerated. In addition, in calculating its transitional tax debits, the corporation would generally be required to use its Ontario allocation factor for the taxation year preceding the transaction or event.

Conversely, a corporation might have a small presence in Ontario (e.g., a consistent 0.1 Ontario allocation factor) and determine that its total Ontario balance at its transition time exceeds its total federal balance at that time. If the corporation increases its presence in Ontario through a transaction, it would have the effect of increasing its transitional tax credits and, typically, increasing its overall Ontario income taxes. In many cases, these effects would offset and the transaction would not be objectionable. However, in some cases, the increase in a corporation's Ontario transitional tax credits may exceed the corporation's increase in Ontario income taxes arising from the discontinuation of the CTA. The transaction may also be regarded as objectionable if,

  • some of the corporation's Ontario tax attributes were previously grossed-up because the corporation had a permanent establishment outside of Ontario;5 or
  • the transaction is driven by the tax position of the transferee.

In order to reduce the incentive for tax-driven transactions designed to increase a corporation's transitional tax credits, if one of the main purposes of a transaction or event (taking in account all the effects of the transaction or event) is to increase a corporation's transitional tax credits, the corporation's amortization period would end as a consequence. The corporation would lose its entitlement to transitional tax credits that would otherwise have been earned in respect of the period after the transaction or event.

The circumstances to which subclause 46(2)(b)(v) of the New Act applies are similar to those to which subclause 46(2)(b)(iv) applies, except that the objectionable transaction or event occurs before the beginning of a particular corporation's amortization period.

Where subclause 46(2)(b)(v) of the New Act applies, the corporation's amortization period ends immediately after it began. In the case of corporate reorganizations, this results in an amalgamation not qualifying as an "eligible amalgamation" and a winding-up not qualifying as an "eligible post-2008 winding-up". Outside the context of an amalgamation or winding-up, the consequence to a corporation in a debit position is that transitional tax debits are accelerated and the calculation of the accelerated debit is based on the highest Ontario allocation factor of the corporation or a predecessor in the pre-2009 period following the time at which the objectionable transaction or event occurs, assuming those Ontario allocation factors are higher than the corporation's current year Ontario allocation factor. If the corporation was in a credit position, as a consequence of the application of subclause 46(2)(b)(v), the corporation would lose all of its entitlement to the transitional tax credit.

46(3) and 47(2)
Special measures that shorten a corporation's amortization period

As set out in subsection 46(3) of the New Act, a corporation's amortization period is shortened where certain conditions are satisfied. Subsection 46(3) only applies where the Ontario Minister assesses or reassesses for a taxation year on the basis that there is a shortening of the amortization period and the corporation does not object to this treatment within 90 days of its last assessment or reassessment for the year. In addition, the total of the transitional tax credits to which the corporation is entitled (determined on the assumption that all transitional credits were claimed in that taxation year rather than spread over 5 years) cannot exceed $1,000.

As set out in subsection 47(2) of the New Act, a corporation may also elect to shorten its amortization period and thereby accelerate the payment of its transitional tax debits. This election is only available for a taxation year if the corporation's Ontario allocation factor for the year is at least 0.9 or the amount of its "excess" total federal balance is not more than $10,000.

46(4)
Leap years

Some of the measures in sections 46 to 52 of the New Act require the calculation of the number of days in a period. For convenience, for these purposes February 29 of a leap year is ignored.

46(5)
Specified corporations

The transitional tax credits and debits only apply to corporations that are "specified corporations".

For a corporation to be a "specified corporation" under subsection 46(5) of the New Act, the following conditions must be satisfied:

  • The corporation is not exempt at or immediately before its transition time from tax payable under Part I of the Federal Act.
  • The corporation has a taxation year that ends before 2009 and a taxation year that includes the start of 2009.6
  • The corporation has a permanent establishment in Ontario at its transition time.
  • The corporation had a permanent establishment in Ontario at any time in its last taxation year ending before 2009 and was subject to tax under Part II of the CTA for that year.
  • If assets of the corporation have been distributed in the course of a winding-up, the winding-up is not an "eligible pre-2009 winding-up" (as described above).

It should be noted, however, that a corporation may also be deemed to be a "specified corporation" because of the operation of section 51 of the New Act.

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Part 3. Calculation of transitional tax debits – general 5-year rule

47(1) and 48(1) and (2)

Under subsections 47(1) and 48(1) of the New Act, a corporation's transitional tax debit for a taxation year is equal to the total of the amount determined under subsection 48(3) in respect of the corporation for the year and the lesser of:

  • a cap prescribed by regulation, if there is such a cap prescribed, and 7
  • the amount determined by the formula "A/B × (C − D) × E".

The amount determined under subsection 48(3) of the New Act relates only to SR & ED performers and is described in Part 4 of the Explanatory Notes.

The fraction "A/B" is the amortization factor for the tax debit, which will typically be one-fifth. This is because "A" is the number of days (usually 365 days) in a corporation's reference period that are in the taxation year and "B" is the number of days in the corporation's reference period (usually 1,825 days). Where there is a short taxation year, the amortization factor would be reduced proportionately.

The amortization factor is also increased where the amortization period ends in the taxation year and before the end of the corporation's reference period. In these cases, "A" is the total number of days in the reference period that are on or after the first day of the year. This results in an acceleration of transitional tax debits. Once the tax debits have been accelerated for a corporation, no further tax debit is payable in future taxation years.

The amount "C−D" is the amount by which a corporation's total federal balance at the end of a taxation year exceeds the corporation's total Ontario balance at the end of the year. These balances are determined under subsections 48(4) to (8) of the New Act and are described in Part 5 of the Explanatory Notes. In the absence of corporate reorganizations and other transactions covered by sections 51 and 52, these balances are constant except to the extent affected by assessments or reassessments for pre-2009 taxation years. The constant nature of these balances is as a consequence of the application of paragraph 1 of each of subsections 48(4) and 48(6) (i.e., a corporation's total federal balance and total Ontario balance at the end of a taxation year is determined with reference to amounts determined as of the beginning of the corporation's first taxation year ending after 2008).

The amount "E" is the corporation's notional Ontario tax rate, as determined under subsection 48(2) of the New Act. In general, the corporation's notional Ontario tax rate is equal to its "adjusted basic rate" for the year (i.e. the corporation's Ontario allocation factor for the year times the basic rate that applies to corporations for the year8). Exceptions apply in the two cases described below.

The first exception applies where a corporation's transitional tax debits for a particular taxation year are accelerated pursuant to the anti-avoidance rule in subclause 46(2)(b)(iv) of the New Act. In these circumstances, the notional Ontario tax rate in "E" is:

  • if the particular year is not the corporation's first taxation year, the corporation's adjusted basic rate for the particular year determined as if the corporation's Ontario allocation factor for the particular year were equal to the greater of the corporation's Ontario allocation factor for the particular year and the corporation's Ontario allocation factor for its previous taxation year, or
  • if the particular year is the corporation's first taxation year, the corporation's adjusted basic rate for the particular year determined as if the corporation's Ontario allocation factor for the particular year were equal to the greater of,
    • the corporation's Ontario allocation factor for the particular year, and
    • the greatest of all amounts each of which is the Ontario allocation factor of another corporation that is a designated corporation with respect to the corporation5, for a taxation year of the designated corporation ending in the calendar year in which the corporation's particular year ends or in the preceding calendar year.

The second exception applies where a corporation's transitional tax debits for a particular taxation year are accelerated pursuant to the anti-avoidance rule in subclause 46(2)(b)(v) of the New Act. In these circumstances, the notional Ontario tax rate in "E" is the corporation's adjusted basic rate for the particular year determined as if the corporation's Ontario allocation factor for the particular year were equal to the greatest of,

  • its Ontario allocation factor for the particular year,
  • all amounts each of which is the corporation's Ontario allocation factor for a taxation year ending in a calendar year before 2009 in or before which a transaction or event, or all or part of a series of transactions or events, occurred that resulted in subclause 46(2)(b)(v) applying for the purposes of determining the corporation's amortization period, and
  • all amounts each of which is an Ontario allocation factor of another corporation that is a designated corporation with respect to the corporation5 for a taxation year of the designated corporation ending in a calendar year described immediately above.

Example 3 illustrates the calculation of transitional tax debits.

Example 3

Corporation B has taxation years ending on June 30. Its Ontario allocation factor at all relevant times is 0.75. Its total federal balance as of July 1, 2008 is $180,000. Its total Ontario balance at that time is $120,000. Control of Corporation B is acquired on September 1, 2011 and Corporation B's taxation years subsequently end on December 31. What are the tax consequences to Corporation B assuming it is a specified corporation and the basic rate of tax for corporations does not change?

Analysis
  1. Corporation B will have transitional tax debits for each of its taxation years ending after 2008 and before 2014 because its total federal balance exceeds its total Ontario balance as of July 1, 2008.
  2. Corporation B's transitional tax debits for a taxation year will equal the amount determined by the formula: A/B × (C − D) × E
  3. "A" is the number of days in the year that are in Corporation B's amortization period. "B" is 1,825 days. "C − D" equals $60,000 (= $180,000 − $120,000). "E" equals 10.5% (= 14% × 0.75)
  4. The resulting transitional tax debits are as follows:
Taxation year end June 30, 2009 June 30, 2010 June 30, 2011 August 31, 2011 December 31, 2011 December 31, 2012 December 31, 2013 Total
Days in the taxation year that are in the amortization period 365 365 365 62 122 365 181 1,825
Debit $1,260 $1,260 $1,260 $214 $421 $1,260 $625 $6,300

47(2)

See Part 2 of the Explanatory Notes.

47(3)

See Part 6 of the Explanatory Notes.

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Part 4. Election for transitional tax debits of SR & ED Performer

48(3)
49(1) "federal current SR & ED deficit", "federal current SR & ED limit" and "qualified Ontario SR & ED expenditure"
49(2) to (6)

Subsection 48(3) of the New Act, in conjunction with subsections 49(1) to (6), provides special rules for SR & ED performers with regard to the calculation of transitional tax credits and debits. The special rules recognize that SR & ED performers sometimes have federal SR & ED balances that greatly exceed their Ontario SR & ED balances, due in part to SR & ED performers using federal ITCs to reduce their federal income tax rather than claiming their federal SR & ED balances.

The special SR & ED rules are designed to provide an election for an SR & ED performer to carve-out a portion of its SR & ED balance at the transition time from its total federal balance. As a consequence, SR & ED performers' regular tax debits can be reduced or eliminated. Instead, separate additional tax debits are provided under subsection 48(3) of the New Act. The SR & ED tax debits are based, in part, on SR & ED deductions claimed for taxation years ending after December 31, 2008. However, if SR & ED performers incur sufficient post-2008 SR & ED expenditures, SR & ED tax debits will arise only for taxation years ending after 2015 (i.e., 7 years later than would be the case in the absence of the election).

Under subsection 48(3) of the New Act, a corporation's SR & ED tax debit for a taxation year is equal to the lesser of the corporation's federal SR & ED transitional balance and the corporation's post-2008 SR & ED balance at the end of the year.

Federal SR & ED Transitional Balance

An electing corporation's starting federal SR & ED transitional balance represents the amount of transitional tax debit that the corporation has deferred and not yet paid because of an election under the definition of "I" in paragraph 1 of subsection 48(4) of the New Act. The transitional tax debit that has been deferred is a proxy for future Ontario corporate income taxes saved as a result of being able to deduct pre-2009 SR & ED expenditures more than once for Ontario purposes.

The calculation of a corporation's federal SR & ED transitional balance under subsection 49(4) of the New Act is determined with reference to the amount excluded from a corporation's total federal balance because of an election under the definition of "I" in paragraph 1 of subsection 48(4) of the New Act.

The excluded amount is the lesser of:

  • the amount, if any, by which the corporation's federal SR & ED balance at its transition time exceeds the total of its Ontario SR & ED balance at its transition time and its adjusted Ontario SR & ED incentive balance (as described in Part 5 of the Explanatory Notes), and
  • the amount, if any, by which the corporation's total federal balance at its transition time (determined without reference to the election) exceeds its total Ontario balance at the transition time.

For this purpose, a corporation's federal SR & ED balance is the amount deductible at the transition time under subsection 37(1) of the Federal Act in computing the corporation's income, determined without reference to the portion of the balance earned before an acquisition of control. The corporation's Ontario SR & ED balance is determined in a similar manner, with regard to amounts deductible in computing income under subsection 37(1) of the Federal Act as it applies for the purposes of the CTA.

A corporation's starting federal SR & ED transitional balance is 14% of the product of:

  • the excluded amount, and
  • the relevant Ontario allocation factor of the corporation, as determined under subsection 49(5).

The only other amounts required to be added to the federal SR & ED transitional balance are those determined under subsection 51(1) of the New Act by reason of an amalgamation or winding-up. The balance is reduced by all the SR & ED tax debits determined under subsection 48(3) of the New Act in respect of the corporation for preceding taxation years.

Under subsection 49(5) of the New Act, a corporation's relevant Ontario allocation factor is the greatest of:

  • the corporation's Ontario allocation factor for its taxation year that includes its transition time,
  • the greatest of the corporation's Ontario allocation factor for any taxation year ending in 2006, 2007 or 2008, and
  • the greatest of all amounts each of which is the weighted Ontario allocation factor for 2006, 2007 or 2008 of the corporation and every corporation that is a designated corporation with respect to it.4

Under subsection 49(6) of the New Act, the weighted Ontario allocation factor of two or more corporations for a calendar year is equal to the total of the corporations' pro-rated Ontario allocation factors for taxation years ending in the calendar year. The pro-ration would reflect the percentage that a corporation's qualified Ontario SR & ED expenditures (as defined in section 11.2 of the CTA and subsection 49(1) of the New Act) incurred in the taxation year is of the corporations' total qualified Ontario SR & ED expenditures for taxation years ending in the calendar year. (A corporation's qualified Ontario SR & ED expenditures would include its share of a partnership's qualified SR & ED expenditures.)

Post-2008 SR & ED Balance

An electing corporation's post-2008 SR & ED balance at the end of a taxation year represents the SR & ED tax debit that an electing corporation must pay for the taxation year when its SR & ED expenditures are less than its SR & ED deductions on a cumulative basis for taxation years ending after 2008 and before 2016. The SR & ED tax debit is a proxy for a corporation's Ontario income tax savings for the year attributable to pre-2009 SR & ED expenditures.

Under subsection 49(2) of the New Act, a corporation's post-2008 SR & ED balance at the end of a taxation year is determined for taxation years ending before 2016 by:

  • adding the amount, if any, by which the amount deducted by the corporation under subsection 37(1) of the Federal Act in computing the corporation's income for the year exceeds the corporation's cumulative post-2008 SR & ED limit at the end of the year,
  • adding, to the above, the corporation's federal current SR & ED deficit for the year, and
  • multiplying the total of the above amounts by 14% and the corporation's relevant Ontario allocation factor (as described above).

A corporation will have a "cumulative post-2008 SR & ED limit" at the end of a taxation year when it has increased its SR & ED pool balance by spending more on SR & ED than it has deducted from income on a cumulative basis for taxation years after 2008 and before 2016. A corporation with a "cumulative post-2008 SR & ED limit" at the end of a taxation year does not pay an SR & ED tax debit for the year, unless it incurs a federal current SR & ED deficit in the year. Under subsection 49(3) of the New Act, a corporation's cumulative post-2008 SR & ED limit at the end of a taxation year is the amount, if any, by which

  • the sum of the corporation's federal current SR & ED limits for the year and preceding taxation years ending after 2008,

exceeds

  • the amount determined by the formula,

    D − [(E − F) / (C × 0.14)]

"C" is the corporation's relevant Ontario allocation factor (described above). "D" is the sum of all amounts deducted under subsection 37(1) of the Federal Act in computing the corporation's income for a preceding taxation year ending after 2008. The amount "E−F" is the amount by which the sum of tax debits determined under subsection 48(3) for preceding taxation years exceeds the portion of those tax debits that are reasonably attributable to the corporation's federal current SR & ED deficit for the year.

A corporation's federal current SR & ED limit for a taxation year is equal to the net increase (if any) in the corporation's SR & ED balance in the year under subsection 37(1) of the Federal Act due to the combined effects of paragraphs 37(1)(a), (b), (c), (c.2), (d) and (e) of the Federal Act. Conversely, a corporation's federal current SR & ED deficit for a taxation year is equal to the net decrease, if any, in that balance in the year due to the combined effects of those paragraphs. A corporation can have a federal current SR & ED deficit for a taxation year where the corporation has significant government assistance recognized in the year and incurs only small amounts of SR & ED expenditures in the year.

For taxation years ending after 2015, a corporation's post-2008 SR & ED balance at the end of a taxation year is determined in the same way, with one important exception. For those taxation years, a corporation's cumulative post-2008 SR & ED limit is ignored with the result that a corporation's SR & ED tax debits are accelerated after 2015 to reflect the full amount of the corporation's post-2015 SR & ED claims.

Effect on SR & ED Performers

The amount excluded from a corporation's total federal balance because of the election for SR & ED performers is a portion of the corporation's pre-2009 federal SR & ED balance. The corporation's excluded amount is recognized as the corporation's pre-2009 federal SR & ED balance is used, rather than over five years.

For taxation years ending before 2016, SR & ED deductions are considered to be claimed first from post-2008 SR & ED expenses (i.e., on a "last-in, first-out" basis) so that a corporation's pre-2009 SR & ED balance will not be considered to be used as long as sufficient post-2008 SR & ED expenses are incurred. For taxation years ending after 2015, a corporation's SR & ED deductions are considered to be claimed first from a corporation's pre-2009 SR & ED balance. These ordering measures result in a minimum 7 year deferral of the transitional tax debits with regard to an excluded amount, provided that an SR & ED performer incurs sufficient post 2008 SR & ED.

Example 4

An SR & ED performer's total federal balance at its transition time (determined without reference to the SR & ED election) is $10 million. Its total Ontario balance is $5.5 million. Included in the total federal balance is a federal SR & ED balance of $9.7 million. Included in the total Ontario balance is $0 of Ontario SR & ED and $3.5 million in respect of federal ITCs under "W" of paragraph 1 of subsection 48(6).

The corporation uses calendar years as taxation years. It claims $350,000 per year for the next 30 years under subsection 37(1) of the Federal Act. In each of those years, the net new amount added to its deduction limit under subsection 37(1) of the Federal Act is $400,000 (being $500,000 of new expenses net of assistance of $100,000).

For the purposes of the example, at all relevant times the basic rate of tax for corporations is assumed to be 14% and the corporation's Ontario allocation factor is assumed to be 0.6.

Analysis
  1. Without the election, the excess of the total federal balance over the total Ontario balance would be $4.5 million, which is the lesser of $4.5 million ($10 million less $5.5 million) and $6.2 million ($9.7 million less $3.5 million). In this case, the tax debits payable by the corporation would normally be expected to be $75,600 per year for five years (totaling $378,000 = $4.5 million × 14% × 0.6).
  2. With the election, the $4.5 million is excluded from the corporation's total federal balance with the result that no tax debits are included in the corporation's tax payable under the five-year amortization schedule.
  3. The corporation's federal current SR & ED limit would be equal to $400,000 for each of its 2009 to 2015 taxation years. As it is assumed to deduct less than this amount per year in computing income under subsection 37(1) of the Federal Act, its cumulative post-2008 SR & ED limit at the end of each of those years starts at $400,000 and would increase by $50,000 each year. The corporation's post-2008 SR & ED balance at the end of each of those taxation years would thus be nil and the corporation would have no transitional tax debits for the 2009 to 2015 taxation years. Indeed, the corporation could have deducted $50,000 more for each of those years under subsection 37(1) of the Federal Act without being subject to transitional tax debits for those years.
  4. For the 2016 taxation year, the corporation's deduction for the year under subsection 37(1) of the Federal Act is $350,000. The corporation's cumulative post-2008 SR & ED balance is no longer taken into account. Thus, at the end of the 2016 taxation year, the corporation's post-2008 SR & ED balance would be $29,400 (14% × $350,000 × 0.6). Consequently, the tax debit of the corporation under subsection 48(3) of the New Act for 2016 would be $29,400.
  5. Similar calculations are made for subsequent taxation years until $378,000 of tax debits arise.
  6. To summarize, no transitional tax debits would arise for the 2009 to 2015 taxation years. $29,400 of tax debits would arise in each of the taxation years from 2016 to 2027. A residual tax debit of $25,200 would arise for the 2028 taxation year.
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Part 5. Calculation of total federal balance and total Ontario balance

48(4) and (5)
Total federal balance

As discussed above, except to the extent offset by its total Ontario balance, a specified corporation's total federal balance under subsection 48(4) of the New Act results in additional tax payable (transitional tax debits) under subsection 47(1).

Under paragraph 1 of subsection 48(4) of the New Act, the main component of a specified corporation's total federal balance is determined as of its transition time (i.e., the beginning of its taxation year that includes the start of 2009). Under paragraph 2 of subsection 48(4), subsection 48(5) and sections 51 and 52, additional amounts are added and subtracted in computing the corporation's total federal balance.

The components of a corporation's total federal balance under paragraph 1 of subsection 48(4) of the New Act as of the beginning of its taxation year that includes the start of 2009 are as follows:

  • the corporation's total undepreciated capital cost balances available as of the end of its preceding taxation year for the purposes of the Federal Act, net of deductions therefrom for the preceding taxation year ("F" and "K"),
  • if the corporation is resident in Canada immediately before the taxation year, its unclaimed gift balances available as of the end of its preceding taxation year for the purposes of the Federal Act, net of deductions therefrom for the preceding taxation year ("G" and "K"),
  • the corporation's total cumulative eligible capital immediately before the taxation year for the purposes of the Federal Act, net of deductions therefrom for the preceding taxation year ("H" and "K"),
  • unless control of the corporation was acquired at the corporation's transition time, the corporation's SR & ED pool balance immediately before the taxation year for the purposes of the Federal Act (other than the portion earned before control of the corporation was last acquired before the transition time), net of deductions therefrom for the preceding taxation year, minus the excluded amount described in Part 4 of the Explanatory Notes if the corporation so elects in writing with its return filed for its taxation year that includes the transition time ("I"),
  • unless control of the corporation was acquired at the corporation's transition time, the total of its cumulative Canadian exploration expense, cumulative Canadian development expense and cumulative Canadian oil and gas property expense immediately before the transition time for the purposes of the Federal Act, net of deductions therefrom for the preceding taxation year ("J" and "K"),
  • the corporation's non-capital loss balance as of the beginning of the taxation year for the purposes of the Federal Act, excluding losses which have expired because of carryforward limits, loss carrybacks and losses from taxation years ending before the last acquisition of control of the corporation ("L"),
  • the corporation's net capital loss balance as of the beginning of the taxation year for the purposes of the Federal Act, determined without regard to loss carrybacks and losses from taxation years ending before the last acquisition of control of the corporation ("M"),
  • the total adjusted cost base at the transition time for the purposes of the Federal Act of partnership interests ("N"),
  • the total amounts claimed for the corporation's preceding taxation year as reserves under specified provisions of the Federal Act as they apply for the purposes of the CTA – since these amounts would have been added in computing income for CTA purposes had Ontario administration continued, the non-recognition of this income inclusion under the New Act is similar to the benefit to a corporation derived from deducting tax pools more than once for Ontario purposes ("P"),
  • 50% of capital gains reserves deducted under subparagraph 40(1)(a)(iii) or 44(1)(e)(iii) of the Federal Act, as it applies for the purposes of the CTA, for the corporation's preceding taxation year ("0.5Q"),
  • the amount, for the purposes of the CTA, of a corporation's "negative" adjusted cost base at its transition time with regard to partnership interests ("R"),
  • in the event that the corporation deducted an amount (other than a reserve) for the purposes of the CTA for a taxation year ending after December 13, 2006 and before 2009, it failed to do so for the purposes of the Federal Act despite being entitled to the same deduction and the deduction of that amount does not reduce its total Ontario balance, the total of all such amounts ("S"), and
  • in the event that the corporation carries on a farming business, any amount added by the corporation under paragraph 28(1)(b) of the Federal Act in computing its income for the corporation's preceding taxation year ("S.1").

The rule in "S" is intended to discourage tax planning activities resulting from the fact that the tax attributes set out in the total federal balance and the total Ontario balance are not comprehensive. For example, a corporation might for federal purposes choose to defer a deduction for registered pension plan contributions claimed for the purposes of the CTA. If this were the case, the Ontario deduction does not reduce the corporation's total Ontario balance. However, if the federal deduction is then claimed for a post-2008 taxation year, this would effectively permit the same amount to be deducted a second time for Ontario purposes. The rule in "S" effectively offsets the benefit of the double deduction. Paragraph 3 of subsection 48(8) (described below) provides a continuation rule for the purposes of "S".

The calculation of the total federal balance for non-resident corporations and life insurers is affected by the rules in paragraphs 1 and 2 of subsection 48(8) (described below). In the event that the corporation is formed on an amalgamation or merger at its transition time, under subsection 51(1) the corporation is considered to be the same corporation as, and a continuation of, each of its taxable predecessor corporations that had a permanent establishment in Ontario.

The calculation of a corporation's total federal balance is subject to regulations. To date, no regulations have been proposed.

48(6) and (7)
Total Ontario balance

As discussed above, except to the extent offset by its total federal balance, a specified corporation's total Ontario balance under subsection 48(6) of the New Act results in transitional tax credits under section 50. The calculation of a corporation's total Ontario balance largely parallels the calculation of the corporation's total federal balance.

More specifically, under paragraph 1 of subsection 48(6) of the New Act, the main component of a specified corporation's total Ontario balance is determined as of its transition time (i.e., the beginning of its taxation year that includes the start of 2009). Under paragraph 2 of subsection 48(6), subsection 48(7) and sections 51 and 52, additional amounts are added or subtracted in computing a corporation's total Ontario balance.

The components of a corporation's total Ontario balance under paragraph 1 of subsection 48(6) of the New Act as of the beginning of its taxation year that includes the start of 2009 are as follows:

  • the corporation's total undepreciated capital cost balances available as of the end of its preceding taxation year for the purposes of the CTA, net of deductions therefrom for the preceding taxation year ("T" and "Y"),
  • if the corporation is resident in Canada immediately before the taxation year, its unclaimed gift balances available as of the end of its preceding taxation year for the purposes of the CTA, net of deductions therefrom for the preceding taxation year ("U" and "Y"),
  • the corporation's total cumulative eligible capital immediately before the taxation year for the purposes of the CTA, net of deductions therefrom for the preceding taxation year ("V" and "Y"),
  • unless control of the corporation was acquired at the corporation's transition time, the total of the corporation's adjusted Ontario SR & ED incentive balance at the end of its taxation year immediately before the transition time (as described below) and the corporation's SR & ED balance at the end of that preceding taxation year for the purposes of the CTA (other than any portion of the balance earned before control of the corporation was last acquired before the transition time), net of deductions therefrom for that preceding taxation year ("W"),
  • unless control of the corporation was acquired at the corporation's transition time, the total of its cumulative Canadian exploration expense, cumulative Canadian development expense and cumulative Canadian oil and gas property expense immediately before the transition time for the purposes of the CTA, net of deductions therefrom for the preceding taxation year ("X" and "Y"),
  • the corporation's non-capital loss balance as of the beginning of the taxation year for the purposes of the CTA, determined without regard to losses which have expired because of carryforward limits, loss carrybacks and losses from taxation years ending before the last acquisition of control of the corporation ("Z"),
  • the corporation's net capital loss balance as of the beginning of the taxation year for the purposes of the CTA, determined without regard to loss carrybacks and losses from taxation years ending before the last acquisition of control of the corporation ("AA"),
  • the total adjusted cost base at the transition time for the purposes of the CTA of partnership interests ("BB"),
  • the total amounts claimed for the corporation's preceding taxation year as reserves under specified provisions of the Federal Act – see in this regard the offsetting treatment provided under "P" under paragraph 1 of subsection 48(4) for the corresponding reserves claimed under the CTA ("CC"),
  • 50% of capital gains reserves deducted under subparagraph 40(1)(a)(iii) or 44(1)(e)(iii) of the Federal Act, for the corporation's preceding taxation year ("0.5DD"),
  • the amount, for the purposes of the Federal Act, of a corporation's "negative" adjusted cost base at its transition time with regard to partnership interests ("EE"),
  • in the event that the corporation carries on a farming business, any amount added by the corporation under paragraph 28(1)(b) of the Federal Act as it applies for the purposes of the CTA in computing its income for the corporation's preceding taxation year ("EE.1"), and
  • any additional amount determined under prescribed rules ("FF").9

The calculation of the total Ontario balance for non-resident corporations and life insurers is affected by the rules in paragraphs 1 and 2 of subsection 48(8) (described below). In addition, in the event that the corporation is formed on an amalgamation or merger at its transition time, under subsection 51(1) the corporation is considered to be the same corporation as, and a continuation of, each of its taxable predecessor corporations that had a permanent establishment in Ontario.

The calculation of a corporation's total Ontario balance is subject to regulations. To date, no regulations have been proposed.

48(8)
Additional rules for calculation of total federal balance and total Ontario balance

Paragraphs 1 and 2 of subsection 48(8) of the New Act are two additional rules that are relevant in determining the total federal balance and total Ontario balance of non-resident corporations and life insurers.

Under paragraph 1 of subsection 48(8) of the New Act, a non-resident corporation's tax attributes that are relevant or potentially relevant in the calculation of the corporation's income from a business are disregarded unless the business is carried on in Canada and is not a "treaty-protected business", as defined in subsection 248(1) of the Federal Act. Similarly, a non-resident corporation's tax attributes that are relevant or potentially relevant in the calculation of the corporation's capital gain from the disposition of a property are not included in the corporation's total Ontario balance or total federal balance unless the property is taxable Canadian property (as defined in subsection 248(1) of the Federal Act) and the property is not treaty-protected property (as defined in subsection 248(1) of the Federal Act). Paragraph 1 of subsection 48(8) also ensures that a non-resident cannot include tax attributes in its total federal balance and total Ontario balance to the extent that those tax attributes are associated with the earning of property income.

Under paragraph 2 of subsection 48(8) of the New Act, special rules apply to life insurers resident in Canada in recognition of the special rules in section 138 of the Federal Act under which life insurers are exempt from income tax from carrying on an insurance business outside Canada and also exempt from capital gains taxation with regard to property used in the course of carrying on an insurance business unless the property is designated insurance property (as defined in subsection 138(12) and 248(1) of the Federal Act). No tax attributes are included in the life insurer's total federal balance or total Ontario balance in respect of an insurance business carried on outside Canada. Similarly, no tax attributes are included in the life insurer's total federal balance or total Ontario balance in respect of a capital property unless the property is designated insurance property.

Paragraph 3 of subsection 48(8) of the New Act is an additional rule that is relevant for the purposes of "S" of the formula in paragraph 1 of subsection 48(4) in connection with the calculation of a corporation's total federal balance. Under this paragraph, continuation rules are provided with regard to the application of "S" on amalgamations and on windings-up to which subsection 88(1) of the Federal Act apply. For example, the continuation rules apply so that a new corporation formed on an amalgamation is treated as if it were a continuation of its predecessor corporations. Consequently, in certain circumstances the new corporation will have an additional total federal balance under "S" of paragraph 1 of subsection 48(4) of the New Act in the event that its predecessor corporation has claimed a higher discretionary deduction under the CTA than under the Federal Act for a taxation year ending after December 12, 2006.

"adjusted gross federal investment tax credit"
49(1)
49(7)
Total Ontario balance – treatment of past federal ITCs for SR & ED Performers

Subsection 49(7) of the New Act sets out the calculation of a corporation's adjusted Ontario SR & ED incentive balance, which is included under "W" of paragraph 1 of subsection 48(6) in computing a corporation's total Ontario balance. A corporation's adjusted Ontario SR & ED incentive balance at the end of the corporation's taxation year immediately preceding its transition time reduces the transitional tax debits (or increases the transitional tax credits) determined in respect of the corporation. The adjusted Ontario SR & ED incentive balance also enters into the calculation of the amount that may be excluded by SR & ED performers from their total federal balance (as described in Part 4 of the Explanatory Notes above).

This balance reflects the incentive to which a corporation would generally have been entitled under section 11.2 of the CTA had Ontario continued to administer its own corporate income taxes.10 The incentive in section 11.2 of the CTA is delivered by reversing, in connection with federal ITC claims of a corporation that are attributable to qualified Ontario SR & ED expenditures, the Ontario income tax effects to the corporation of rules under the Federal Act that treat federal ITC claims as taxable government assistance in the taxation year following the taxation year for which the claim is made.

A corporation's "adjusted Ontario SR & ED incentive balance" at the end of the corporation's taxation year immediately preceding its transition time is determined by:

  • Determining the portion of the corporation's adjusted gross federal investment tax credit at the end of that year that has not been deducted under subsection 127(5) or (6) of the Federal Act for a preceding taxation year. The expression "adjusted gross federal investment tax credit" is defined in subsection 49(1) and refers to federal ITCs that:
    • are earned in that year and preceding taxation years,
    • were not earned in taxation years ending before the time control of the corporation was last acquired, and
    • are attributable to qualifying Ontario SR & ED expenditures.
  • Reducing the amount above to reflect any unused federal ITCs that expire at the end of the year because of the 10-year federal carryforward limit for unused federal ITCs applicable to credits earned in taxation years ending before 2006.
  • Where the corporation's relevant Ontario allocation factor is less than one, grossing-up the resulting amount to reflect the relevant Ontario allocation factor.

Example 5 illustrates the operation of subsection 49(7) of the New Act.

Example 5

A corporation has an Ontario allocation factor of 0.6 and uses calendar years as taxation years.

The corporation's federal ITC balance under subsection 127(9) of the Federal Act is $3.3 million at the end of 2008 without reference to prior federal ITC claims, $2.1 million of which is attributable to qualifying Ontario SR & ED expenditures (all of which are assumed to be of a current nature). This balance is determined without reference to federal ITC claims made for the 2008 taxation year and to carrybacks of federal ITCs earned in subsequent taxation years. It is assumed that no portion of this amount would expire if unclaimed.

The corporation claimed $100,000 of the recognized Ontario portion of its federal ITC balance for 2008 and $150,000 of the recognized Ontario portion of its federal ITC balance for 2007. No other federal ITC claims have been made.

Analysis
  1. For 2008, deductions are available under subsection 11.2(3) of the CTA equal to $250,000 (=$150,000/0.6) to reflect federal ITC claims for 2007. If Ontario administration of corporate income taxes had continued and remaining federal ITCs had been claimed before their carryforward period expired, the remaining recognized Ontario portion of the federal ITC balance ($1.95 million = $2.1 million − $150,000) would have resulted in further deductions under subsection 11.2(3) of the CTA. The further deductions would have been grossed-up to $3.25 million (=$1.95 million/0.6) in order to provide Ontario tax savings equal to $273,000 ($3.25 million × 14% × 0.6) if a 14% rate is assumed.
  2. The corporation's "adjusted gross federal investment tax credit" at the end of its 2008 taxation year is equal to $2.1 million. The $100,000 claimed for 2008 does not result in a reduction under "N" of subsection 49(7) of the New Act to the calculation of the corporations "adjusted Ontario SR & ED incentive balance" as there are no federal ITCs expiring. The $150,000 claimed for 2007 results in a reduction under "P" of subsection 49(7) so that the corporation's adjusted Ontario SR & ED balance is $1.95 million, before taking into account the gross-up. The $1.95 million amount is grossed-up to $3.25 million to reflect the corporation's Ontario allocation factor. The $3.25 million is added in determining the corporation's total Ontario balance.
  3. This addition to the corporation's total Ontario balance would, over five years, reduce its transitional tax debits (or potentially increase its transitional tax credits) by $273,000 ($3.25 million × 14% × 0.6). The $273,000 benefit corresponds to the tax benefit that the corporation would have received under section 11.2 of the CTA if Ontario administration of corporate income tax had continued.
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Part 6. Calculation of transitional tax credits

50

Subsection 47(3) of the New Act provides for a non-refundable transitional tax credit that reduces a corporation's Ontario income tax. There are two components of the transitional tax credit, each of which is determined for a taxation year of a corporation that includes all or part of the corporation's amortization period.

The first component (referred to in subparagraphs 1 i. and 2 i. of subsection 50(1) of the New Act) is the calculation for the current taxation year, determined without reference to the carryforward of unused transitional tax credits. The second component is the carryforward of transitional tax credits from previous taxation years that could not be used because a corporation had insufficient Ontario income tax.

Under subsections 50(1) and (2) of the New Act, the first component of a specified corporation's tax credit for a taxation year is equal to the least of:

  • if an amount is prescribed, that amount,9
  • a tax limit for the year, determined by the formula "C × D/E", and
  • a credit limit for the year, determined by the formula "F/G × (H−I) × J".

With regard to the tax limit for a taxation year, "C" is the corporation's income tax payable for the year (determined before the tax credit for corporate minimum tax, transitional tax credits and the new 4.5% tax credit for Ontario SR & ED). "D/E" is one or less. It is typically one, since "D" is the number of days in the corporation's amortization period that are in the taxation year and "E" is the number of days in the taxation year. If a corporation's amortization period ends before the end of the taxation year, the factor would be reduced proportionately.

The credit limit for a taxation year is similar to the calculation of the transitional tax debit in subsection 48(1) of the New Act. "F/G" represents an amortization factor, which is typically one-fifth, as "F" is generally equal to the number of days in the corporation's amortization period that are in the taxation year and "G" is equal to the number of days in the corporation's reference period. However, the amortization factor is less than one-fifth in the case of a short taxation year. In addition, "F" is increased by the number of days in the reference period after the end of the taxation year in the event that the corporation's amortization period is shortened because of the application of subclause 46(2)(b)(ii), (iii) or (vi) or subsection 46(3). The increase in "F" in these circumstances permits the acceleration of tax credits.

The amount "H-I" for a taxation year is the amount by which a corporation's total Ontario balance exceeds the corporation's total federal balance at the end of the year. These balances are determined under subsections 48(4) to (8) of the New Act (described in detail above). It should be noted that, in the absence of corporate reorganizations and other transactions covered by sections 51 and 52, these balances are constant except to the extent affected by assessments or reassessments for pre-2009 taxation years.

The amount "J" is equal to a corporation's "adjusted basic rate" for the year (i.e. presently 14% times the corporation's Ontario allocation factor).

The second component of a corporation's transitional tax credit, designed to allow for the carryforward of unused transitional tax credits, is determined under subsections 50(3) and (4) of the New Act. The second component for a taxation year is equal to the lesser of:

  • the unused portion of the tax limit (as described above) that is determined with regard to the first component, and
  • the corporation's unused credit balance for the year.

A corporation's "unused credit balance" for a taxation year is essentially the total of the corporation's transitional tax credits for previous taxation years that could not be used because the corporation had insufficient Ontario income tax. More specifically, under subsection 50(4) of the New Act, a corporation's unused credit balance for a taxation year is equal to the sum of differences between the credit limit under the first component for previous taxation years and the transitional tax credits deductible under the first component for previous taxation years, net of amounts claimed for previous taxation years under the second component. In the case of qualifying amalgamations and windings-up, additional amounts can be added into a corporation's unused credit balance because of the application of section 51 (described in Part 7 of the Explanatory Notes).

Example 6 illustrates the calculation of the transitional tax credit.

Example 6

Corporation C uses calendar years as its taxation years. Its Ontario allocation factor at all relevant times is 0.75. Its total federal balance as of January 1, 2009 is $120,000. Its total Ontario balance as of that date is $180,000.

It is further assumed that "C" under its tax limit for a taxation year is $400 (2009), $900 (2010), $10,000 (2011), $0 (2012) and $5,000 (2013).

How is the transitional tax credit calculated for Corporation C, assuming it is a specified corporation and the basic rate of tax for corporations does not change?

Analysis
  1. Subject to limits, Corporation C will have a tax credit for each taxation year ending in the period from January 1, 2009 to December 31, 2013.
  2. The table below sets out the tax credit calculations.
  2009 taxation year 2010 taxation year 2011 taxation year 2012 taxation year 2013 taxation year Total
Tax limit
(C × D/E)
$400 = $400 × 365/365 $900 $10,000 $0 $5,000  
Credit limit1 $1,260 $1,260 $1,260 $1,260 $1,260  
Credit (first component) $400 $900 $1,260 $0 $1,260 $3,820
Unclaimed credit carried forward from preceding years n/a $860 $1,220 $0 $1,260  
Remaining tax limit after first component credit n/a $0 $8,740 = $10,000 − $1,260 $0 $3,740 = $5,000 − $1,260  
Credit (second component) n/a $0 $1,220 $0 $1,260 $2,480
Total credit $400 $900 $2,480 $0 $2,520 $6,300

1(F/G × (H − I) × J) or [365/1,825 × ($180,000 − $120,000) × (14% × 0.75)]

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Part 7. Additional Special Rules

51
Amalgamations and windings-up

Paragraph 1 of subsection 51(1) of the New Act governs only amalgamations or mergers that occur at a new corporation's transition time. If the amalgamation or merger occurs precisely at the transition time, the new corporation is treated as the same corporation as, and a continuation of, each predecessor corporation with an Ontario permanent establishment that is not exempt from tax under Part I of the Federal Act. If paragraph 1 of subsection 51(1) applies, it would require a corporation's federal balance and total Ontario balance to be calculated in accordance with this assumption and provides for the new corporation to be treated as a "specified corporation".

With regard to amalgamations or mergers at or after the new corporation's transition time that are not covered by paragraph 1 of subsection 51(1) of the New Act, the new corporation is treated under paragraph 2 of subsection 51(1) as a different corporation. Instead, continuity is provided through the operation of paragraph 3 of subsection 51(1). As a consequence of paragraph 2 of subsection 51(1), corporations formed on an amalgamation after the start of 2009 will not have any tax transitional tax credit or tax debit unless one of the measures in section 51 applies.

Paragraph 3 of subsection 51(1) of the New Act applies to a new corporation formed as a result of an eligible amalgamation (described in Part 2 of the Explanatory Notes) in respect of a predecessor corporation. In this event,

  • the new corporation is treated as a specified corporation,
  • in computing the new corporation's total federal balance and total Ontario balance, the amounts set out in subsection 51(2) and (3), respectively, are added,
  • the predecessor corporation's unused credit balances are effectively transferred to the new corporation, to the extent that they would have been available to the predecessor corporation had it continued in existence, and
  • the new corporation assumes any residual portion of the predecessor corporation's federal SR & ED transitional balance, which would be required to be recognized by the new corporation in accordance with the methodology set out in Part 4 of the Explanatory Notes. It should be noted that, for simplicity, no continuation is provided with regard to a predecessor corporation's cumulative post-2008 SR & ED limit.

The amount added, under subsection 51(2) of the New Act, in computing a new corporation's total federal balance in respect of an eligible predecessor corporation is the predecessor corporation's total federal balance, determined immediately before the eligible amalgamation, multiplied by the factor "(1 − B/C)".

The factor "(1 − B/C)" reflects the previously unrecognized proportion of the predecessor corporation's total federal balance. This is because "B" is equal to the number of days in the predecessor corporation's reference period before the amalgamation and because "C" is equal to the number of days in the predecessor corporation's reference period.

The amount added, under subsection 51(3) of the New Act, in computing the new corporation's total Ontario balance is determined in the same manner as under subsection 51(2) (except that the starting point is the predecessor corporation's total Ontario balance immediately before the eligible amalgamation).

Example 7 illustrates the operation of paragraphs 2 and 3 of subsection 51(1) and subsections 51(2) and (3) of the New Act.

Example 7

The related Ontario corporations involved are Corporation A (Ontario allocation factor of 1 and December 31 year ends) and Corporation B (Ontario allocation factor of 0.75 and June 30 taxation year ends). Corporation A and Corporation B amalgamate on September 1, 2011 to form Corporation AB. What are the tax consequences assuming the basic rate of tax for corporations does not change and that Corporation AB adopts a December 31 taxation year-end and has a "breakeven" Ontario allocation factor, as discussed below?

Corporation A's total federal balance is assumed to be $100,000 and its total Ontario balance is assumed to be $70,000. Corporation B's total federal balance is assumed to be $180,000 and its total Ontario balance is assumed to be $120,000.

Analysis
  1. The transitional tax debits of Corporations A and B are set out in the table below. The calculations for these corporations are similar to the calculations in Examples 1 and 3.
  2. The amount added in respect of Corporation A in computing Corporation AB's total federal balance is the product of Corporation A's total federal balance of $100,000 and the formula:

    (1 − B/C)

    in which "B" is the 973 days in Corporation A's reference period before the amalgamation and "C" is 1,825 days. The resulting product is $46,685.

  3. The same formula is used in determining the product added to Corporation AB's total Ontario balance of $70,000 in respect of Corporation A. The resulting product is $32,679. The difference between the total federal balance and the total Ontario balance contributed to Corporation AB in respect of Corporation A is thus equal to $14,005 (=$46,685 − $32,679).
  4. The amount added in respect of Corporation B in computing Corporation AB's total federal balance is the product of Corporation B's total federal balance of $180,000 and the formula described above. However, in this case "B" equals 1,157 days and "C" equals 1,825 days. The resulting product is $65,885.
  5. Similarly, the product added to Corporation AB's total Ontario balance of $120,000 in respect of Corporation B is $43,923. The difference between the total federal balance and the total Ontario balance contributed to Corporation AB in respect of corporation B is thus equal to $21,962 (=$65,885 − $43,923).
  6. Consequently, Corporation AB's total federal balance equals $112,570. Its total Ontario balance equals $76,603. The difference between the two balances equals $35,967.
  7. Corporation AB's tax debits will depend on its Ontario allocation factor. One would expect that the amalgamation would result in an Ontario allocation factor of between 0.75 and 1. If Corporation AB has an Ontario allocation factor that is in the lower part of this range, it would have lower transitional tax debits that would be expected to offset lower tax benefits due to harmonization for Corporation AB. Conversely, if Corporation AB has an Ontario allocation factor that is in the higher part of this range, it would have higher Ontario transitional tax debits that would be expected to offset higher tax benefits.
  8. Corporation AB will have transitional tax debits that correspond exactly to those of its predecessors if it has an Ontario allocation factor that represents the average Ontario allocation factor of its predecessors, weighted in accordance with the differences in the total federal balance and total Ontario balance contributed by each predecessor. This "break-even" Ontario allocation factor for Corporation AB is 0.8473, which is equal to [(1 × $14,005) + (0.75 × $21,962)]/$35,967.
  9. Corporation AB's transitional tax debit for its 2011 taxation year is determined by the formula:

    A/B × (C − D) × E

    in which "A" is the 122 days in Corporation AB's reference period that are in the taxation year, "B" is the 852 days in Corporation AB's reference period, "C" is $112,570 (as calculated above), "D" is $76,603 (as calculated above) and "E" is 11.86% (0.8473 allocation factor times 14%). For the 2011 taxation year, corporation AB's transitional tax debit is thus $611.

  10. Corporation AB's transitional tax debit for its 2012 and 2013 taxation years would be calculated in the same way, except that "A" would be equal to 365 days. The resulting transitional tax debit for those years would thus be equal to $1,828 per year.
  11. Thus, the transitional tax debits for Corporations A, B and AB are as follows:

    Corporation A 2009 taxation year 2010 taxation year Jan. 1 to Aug. 31, 2011   TOTAL
    $840 $840 $559   $2,239
    Corporation B Taxation year ending June 30, 2009 Taxation year ending June 30, 2010 Taxation year ending June 30, 2011 July 1 to Aug. 31, 2011  
    $1,260 $1,260 $1,260 $214 $3,994
    Corporation AB Sept. 1 to Dec. 31, 2011 2012 taxation year 2013 taxation year    
    $611 $1,828 $1,828   $4,267
    TOTAL $10,500
  12. The $10,500 amount is identical to the total transitional tax debits that would have been payable by Corporations A and B had these corporations continued in existence. ($10,500 = (5 × $840) + (5 × $1,260)). These amounts are identical is because of the new corporation's "breakeven" Ontario allocation factor – in all other cases, Corporation AB's transitional debit would result in greater or lesser overall transitional tax debits.

Paragraph 3.1 of subsection 51(1) sets out continuation rules with regard to federal SR & ED transitional balances in the event that paragraph 3 of that subsection is not applicable and an amalgamation or merger occurs after a corporation's amortization period. Where the amalgamation or merger would have been an eligible amalgamation had it occurred before the expiry of predecessors' amortization periods, the new corporation formed on the amalgamation or merger is deemed to be a specified corporation and the new corporation inherits the predecessor corporation's federal SR & ED transitional balance. Paragraph 4.1 of subsection 51(1) provides a corresponding rule with regard to winding-ups.

Paragraph 4 of subsection 51(1) of the New Act applies to a parent corporation to which property has been distributed in the course of an eligible post-2008 winding-up (described in the Part 2 of the Explanatory Notes). In this event,

  • the parent corporation is, after the completion time of the winding-up, treated as a specified corporation,
  • the subsidiary corporation is deemed not to have any taxation year beginning after the completion time, with the result that it will not be subject to transitional tax credits and debits for any such taxation year,
  • in computing the parent corporation's total federal balance and total Ontario balance, the amounts set out in subsection 51(4) and (5), respectively, in respect of the subsidiary corporation are added,
  • the subsidiary corporation's unused credit balance is effectively transferred to the parent corporation, to the extent that it would have been available to the subsidiary corporation had it continued in existence, and
  • the parent corporation assumes any residual portion of the subsidiary corporation's federal SR & ED transitional balance, which would be required to be recognized by the parent corporation in accordance with the methodology set out in Part 4 of the Explanatory Notes.

The amount added, under subsection 51(4) of the New Act, in computing a parent corporation's total federal balance is the subsidiary corporation's total federal balance, determined at the completion time, multiplied by the factors "F/G" and "H/I".

The factor "F/G" (which is always less than one) reduces the amount otherwise determined under subsection 51(4) to reflect the previously recognized portion of the subsidiary corporation's total federal balance. This is because "F" is equal to the number of days in the subsidiary corporation's reference period that are after the completion time and because "G" is equal to the number of day's in the subsidiary corporation's reference period.

The factor "H/I" (which is always at least one) grosses-up the amount otherwise determined under subsection 51(4) to take into account any period in the parent corporation's amortization period prior to the parent corporation's taxation year beginning before the time immediately after the completion. This is because "H" is equal to the number of days in the parent corporation's reference period and "I" is the number of days in the parent corporation's reference period that are after the beginning of its taxation year that includes the time that is immediately after the completion time. The gross-up is appropriate as the period described in "I" has the effect of reducing the calculation of transitional tax credits and debits even though the period was irrelevant in the recognition of the total federal balance.

The amount added, under subsection 51(5) of the New Act, in computing the parent corporation's total Ontario balance is determined in the same manner as the additional amount under subsection 51(4) (except that the starting point is the subsidiary corporation's total Ontario balance at the completion time).

Example 8 illustrates the operation of subsections 51(4) and (5) of the New Act.

Example 8

Corporation B's total federal balance is $180,000 and its total Ontario balance is $120,000. Corporation B, with an Ontario allocation factor of 0.75 and a June 30 taxation year is wound-up in its taxation year ending June 30, 2012 into a parent corporation that has a calendar taxation year but that has no previous permanent establishment in Ontario. The winding-up is an eligible post-2008 winding-up. The parent corporation has been in existence since before 2008 and uses calendar years as its taxation years. What are the tax consequences assuming the basic rate of tax for corporations does not change and that the Ontario allocation factor for the parent corporation after the winding-up is also 0.75?

Analysis
  1. Corporation B's transitional tax debit will be $1,260 per year for its taxation years ending on June 30, 2009, 2010, 2011 and 2012. For further detail, see similar calculations in Example 3.
  2. The parent corporation does not have transitional tax debits for its 2009 to 2011 taxation years because it is not a "specified corporation" in respect of those taxation years.
  3. The parent corporation's total federal balance relevant to its 2012 and 2013 taxation years is the product of Corporation B's total federal balance ($180,000) and the amount determined by the formula:

    F/G × H/I

    in which "F" is 365 days, "G" is 1,825 days, "H" is 1,825 days and "I" is 730 days. The resulting product is $90,000.

  4. The same formula is applied in determining the parent corporation's total Ontario balance. The resulting product in this case is $60,000.
  5. The parent corporation's transitional tax debit for each of the 2012 and 2013 taxation years is determined by the formula:

    A/B × (C − D) × E

    in which "A" is 365 days (days in reference period that are in the taxation year), "B" is 1,825 days (days in the reference period), "C" is $90,000 (as calculated above), "D" is $60,000 (as calculated above), and "E" is 10.50% (0.75 allocation factor times 14%). Consequently, the parent corporation's transitional tax debit for each of the 2012 and 2013 taxation years is $630.

  6. Thus, the tax debits for Corporation B and its parent corporation are as follows:

    Corporation B Taxation year ending June 30, 2009 Taxation year ending June 30, 2010 Taxation year ending June 30, 2011 Taxation year ending June 30, 2012 TOTAL
    $1,260 $1,260 $1,260 $1,260 $5,040
    Parent corporation 2012 taxation year 2013 taxation year      
    $630 $630     $1,260
    TOTAL $6,300
  7. The $6,300 total is equal to the total transitional tax debits that would have been imposed on Corporation B had it not been wound up.

Paragraph 5 of subsection 51(1) of the New Act deals with the case where property of a subsidiary is distributed in the course of an "eligible pre-2009 winding-up" referred to in clause (a) of the definition of that expression in subsection 46(1), to its parent corporation. In this case, the parent corporation is effectively treated as a continuation of the successor and inherits the subsidiary corporation's transitional tax credits and debits. More specifically,

  • pursuant to paragraph 5 of subsection 46(5), the rules for transitional tax credits and debits do not apply to the subsidiary corporation,
  • the parent corporation is deemed, after the completion time of the winding-up, to be a specified corporation, and
  • in computing the parent corporation's total federal balance and total Ontario balance after the completion time, under subsections 51(6) and (7) there is added the subsidiary corporation's total federal balance and total Ontario balance determined immediately after the completion time.

Example 10, below, illustrates the operation of subsections 51(6) and (7).

52
Treatment of specified pre-2009 transfers

Section 52 of the New Act deals with certain pre-2009 non-arm's length transfers occurring on a rollover basis between corporations or on a winding-up, where the disposition takes places at different values for Ontario and federal tax purposes and occurs in a taxation year of either the transferee or the transferor that ends after 2008. Where section 52 applies, the total federal balance and total Ontario balance of the transferee or the transferor are adjusted.

Subsections 52(2) and (3) of the New Act apply where the transfer occurs in a taxation year of the transferee ending after 2008. If these subsections apply, there is an addition to the transferee's total federal balance and total Ontario balance with regard to property received by the transferee on a disposition. For the subsections to apply, the following additional conditions must be satisfied:

  • the disposition is before 2009 and between non-arm's length corporations,
  • the transferee was a specified corporation (as defined in subsection 46(5)) at its transition time,
  • the disposition would have resulted in an increase in the transferee's total federal balance (determined without reference to the SR & ED election) or total Ontario balance had it been made immediately before its transition time,
  • the time of the disposition is in a taxation year of the transferor ending before 2009 during which the transferor has a permanent establishment in Ontario, and
  • the proceeds of disposition under the Federal Act do not equal the proceeds of disposition under the CTA.

A further condition applies in connection with a disposition that is part of an eligible pre-2009 winding-up under which the transferor is wound-up into the transferee. In these cases, the time of the disposition cannot be after the "completion time" of the winding-up. Additional rules would apply to these windings-up under subsections 51(6) and (7) of the New Act.

Under subsection 52(2) of the New Act, the addition to the transferee's total federal balance where these conditions are satisfied is equal to the "adjusted proceeds" as determined for purposes of the Federal Act. Similarly, the addition to the transferee's total Ontario balance in these circumstances is equal to the "adjusted proceeds" as determined for the purposes of the CTA. "Adjusted proceeds" is defined in subsection 52(1) of the New Act. For transfers of eligible capital property (such as quotas), adjusted proceeds is equal to ¾ of the transferor's proceeds of disposition for the purposes of the Federal Act or the CTA, as the case may be. For transfers of all other types of property, adjusted proceeds is equal to the transferor's proceeds of disposition for the purposes of the Federal Act or the CTA, as the case may be

Example 9 illustrates the operation of subsections 52(2) and (3) of the New Act.

Example 9

Corporation A (which has April 30 taxation year ends) is related to Corporation B (which has December 31 taxation year ends). On November 1, 2008, Corporation B transfers depreciable property to Corporation A on a rollover basis pursuant to section 85 of the Federal Act in exchange for shares issued by Corporation A. The proceeds of disposition for the purposes of the Federal Act are equal to the cost amount of the depreciable property for the purposes of the Federal Act (e.g., $10,000). The proceeds of disposition for the purposes of the CTA are equal to the cost amount of the depreciable property for the purposes of the CTA (e.g., $7,000). The Ontario allocation factor for each corporation is assumed to be one.

Corporation A is a specified corporation as of May 1, 2008. Further, it is assumed that Corporation A's total federal balance and total Ontario balance are otherwise equal.

Analysis
  1. Given the facts set out above, all the conditions for the application of subsection 52(2) of the New Act are satisfied.
  2. The New Act, not the CTA, is relevant for the purposes of calculating the cost amount to Corporation A of the depreciable property because the disposition occurs in a taxation year of Corporation A that ends after 2008. The cost amount to Corporation A, for both federal and Ontario purposes is $10,000.
  3. To compensate for its higher cost amount and Ontario tax benefit, Corporation A is required to add $10,000 to its total federal balance and $7,000 to its total Ontario balance.
  4. As a consequence, Corporation A's transitional tax debits over five years would be expected to equal $420 (14% × ($10,000 − $7,000)).

Example 10 illustrates the operation of subsections 51(6) and (7) and 52(2) and (3).

Example 10

A subsidiary corporation with a December 31 taxation year end winds-up into its parent corporation on November 1, 2008 by a winding-up transaction to which subsection 88(1) of the Federal Act applies and under which its only depreciable property is transferred. The depreciable property has a cost amount of $20,000 for federal purposes and $16,000 for Ontario purposes. The latter date is included in the parent corporation's first taxation year ending after 2008.

The parent corporation's total federal balance and total Ontario balance, determined before taking into account the winding-up and all other transactions after the parent corporation's transition time, are each nil. The subsidiary corporation's total federal balance and total Ontario balance are $12,000 and $15,000 respectively, determined as of January 1, 2009, after taking into account the effect of the winding-up and all other transactions prior to January 1, 2009. The Ontario allocation factor for each corporation is assumed to be one.

Analysis
  1. The winding-up is an eligible pre-2009 winding-up, with the result that the subsidiary corporation is exempt from transitional tax credits and debits because of paragraph 5 of subsection 46(5).
  2. The winding-up transaction on November 1, 2008 reduces the subsidiary corporation's federal undepreciated capital cost by $20,000 and its Ontario undepreciated capital cost by $16,000.
  3. The cost amount to the parent corporation for both Ontario and federal purposes of the property received in the winding-up is generally equal to $20,000 under paragraph 88(1)(c) of the Federal Act, which would provide an Ontario tax benefit in that the reduction to the subsidiary corporation of the undepreciated capital cost for Ontario purposes is only $16,000. As a consequence of subsections 52(2) and (3), the parent corporation's total federal balance must thus be increased by $20,000 and the parent corporation's total Ontario balance must thus be increased by $16,000.
  4. Under subsections 51(6) and (7), the parent corporation inherits the total federal balance and total Ontario balance from the subsidiary. The balances are determined as of January 1, 2009 after taking into account the effect of earlier transactions.
  5. Consequently, the parent corporation's total federal balance would be equal to $32,000 (=$20,000 + $12,000). The parent corporation's total Ontario balance would be equal to $31,000 (=$16,000 + $15,000).
  6. The differences between the two balances would be $1,000, which would generally be expected to result in Ontario transitional tax debits of $140 over five years.

Subsections 52(4) and (5) of the New Act apply where the transfer occurs in the taxation year of the transferor ending after 2008. If these subsections apply, there is a reduction of a transferor's total federal balance and total Ontario balance with regard to property disposed of by the transferor on a disposition. For the subsections to apply, the following additional conditions must be satisfied:

  • the disposition is before 2009 and between non-arm's length corporations,
  • the transferor was a specified corporation (as defined in subsection 46(5)) at its transition time,
  • the disposition would have resulted in decreases in a transferor's total federal balance (determined without reference to the SR & ED election) or total Ontario balance had it been made immediately before its transition time,
  • the time of the disposition is in a taxation year of the transferee ending before 2009 during which the transferee has a permanent establishment in Ontario, and
  • the cost amount under the Federal Act of the property to the transferee immediately after the disposition does not equal its cost amount under the CTA.

Under subsection 52(4) of the New Act, the reduction of the transferor's total federal balance in these circumstances is equal to the property's "adjusted cost" as determined for purposes of the Federal Act. Similarly, the reduction of the transferor's total Ontario balance in these circumstances is equal to the property's "adjusted cost" as determined for the purposes of the CTA. "Adjusted cost" is defined in subsection 52(1) of the New Act. For transfer of eligible capital property (such as quotas), adjusted cost is equal to ¾ of the cost amount to the transferee of the property for the purposes of the Federal Act or the CTA, as the case may be. For transfers of all other types of property, adjusted cost is equal to the cost amount to the transferee of the property for the purposes of the Federal Act or the CTA, as the case may be.

Example 11 illustrates the operation of subsections 52(4) and (5).

Example 11

The facts in Example 11 are essentially the same as in Example 9, except that taxation year ends of Corporations A and B are reversed.

Corporation A (which has December 31 taxation year ends) is related to Corporation B (which has April 30 taxation year ends). On November 1, 2008, Corporation B transfers depreciable property to Corporation A on a rollover basis pursuant to section 85 of the Federal Act in exchange for shares issued by Corporation A. The cost amount under the Federal Act to the transferee of the property for the purposes of the Federal Act is equal to the proceeds of disposition to the transferor of the depreciable property for the purposes of the Federal Act (e.g., $10,000). The cost amount under the CTA to the transferee is equal to the proceeds of disposition of for the transferor under the CTA (e.g., $7,000).

Corporation B is a specified corporation as of May 1, 2008. Further, it is assumed that Corporation B's total federal balance and total Ontario balance are otherwise equal.

Each corporation's Ontario allocation factor is one.

Analysis
  1. Given the facts sets out above, all the conditions for the application of subsection 52(4) of the New Act are satisfied.
  2. The New Act, not the CTA, is relevant for the purposes of calculating the proceeds to Corporation B of the depreciable property because the disposition occurs in a taxation year of Corporation B that ends after 2008. The proceeds to Corporation B, for both federal and Ontario purposes, are $10,000.
  3. To compensate for Corporation B's proceeds for Ontario purposes being higher than the cost amount for Ontario purposes of the property for Corporation A and to offset the resulting additional transitional tax debits (or lower transitional tax credits) for Corporation A, $10,000 is subtracted from Corporation B's total federal balance and $7,000 from its total Ontario balance.
  4. As a consequence, Corporation B's transitional tax credits over five years would be expected to equal $420 (14% × ($10,000 − $7,000)).
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1 Subsection 46(5) of the New Act provides a special rule in this regard for a corporation if the taxation year of the corporation is deemed to end on December 31, 2008 because of the application of subsection 249(3) of the Federal Act.
2 The basic rate of Ontario corporate income tax is currently 14%.
3 Assuming $200,000 in taxable income before capital cost allowance claims, all from an active business carried on exclusively in Ontario.
4 "Designated corporation" is defined in subsection 1(1) of the New Act, essentially as a direct or indirect predecessor corporation through one or more tax-deferred amalgamations or windings-up.
5 Gross-ups of this nature are provided, for example, in section 11.2 of the CTA. These gross-ups can distort a corporation's Ontario tax position in the event that its Ontario allocation factor significantly changes.
6 This condition is not required to be met for a corporation if the corporation's taxation year is deemed to end on December 31, 2008 because of subsection 249(3) of the Federal Act. Instead, such a corporation is merely required to have a taxation year that begins after December 31, 2008.
7 To date, no cap has been proposed.
8 The basic rate for corporations is presently 14%.
9 To date, no prescribed rules have been proposed.
10 Section 11.2 of the CTA is effectively replaced by the tax credit now provided in section 39 of the New Act.

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