Consultation Draft on Ontario's Corporate Minimum Tax Regulations

Consultation Draft on Ontario's Corporate Minimum Tax Regulations

1. Ontario Regulation 509/07 is amended by adding the following sections:

Part I
interpretation

Definitions and interpretation
0.1 (1) In this Regulation,

“eligible amalgamation” means an amalgamation of two or more corporations to which section 87 of the Federal Act applies;

“eligible event” means, in respect of a corporation,

  1. a disposition of property by the corporation before March 22, 2007 where,
    1. the property is an eligible property for the purposes of subsection 85 (1) of the Federal Act and a joint election in respect of the disposition is made,
      1. under subsection 85 (1) of the Federal Act, and
      2. under section 57.9 of the Act,
    2. the property is an eligible property for the purposes of subsection 85 (1) of the Federal Act that is described in paragraph 85 (2) (a) of that Act and a joint election in respect of the disposition is made,
      1. under subsection 85 (2) of the Federal Act, and
      2. under section 57.9 of the Act,
    3. the property is a share of the capital stock of a taxable Canadian corporation and,
      1. section 85.1 of the Federal Act applies in respect of the disposition, and
      2. a joint election in respect of the disposition is made under section 57.9 of the Act, or
    4. the property is property referred to in subsection 97 (2) of the Federal Act and a joint election in respect of the disposition is made under that subsection of the Federal Act and under section 57.9 of the Act,
  2. a disposition of property by the corporation before March 22, 2007 where the disposition occurs in circumstances to which subsection 142.7 (3) of the Federal Act applies and a joint election in respect of the disposition is made under subsection 57.9.1 (2) of the Act,
  3. a disposition of property by the corporation before March 22, 2007 where the proceeds of disposition of the property are determined under subsection 13 (4) or 14 (6) of the Federal Act or under section 44 of that Act and an election in respect of the disposition is made under subsection 57.10 (1) of the Act,
  4. the receipt by the corporation of a property referred to in paragraph 88 (1) (a) of the Federal Act in connection with an eligible winding-up that was completed before March 22, 2007, or
  5. the receipt by the corporation of property as a consequence of an eligible amalgamation before March 22, 2007;

“eligible winding-up” means the winding-up of a corporation in circumstances in which subsection 88 (1) of the Federal Act applies;

“exempt event” means a disposition or other event that is not an eligible event under clause (a), (c), (d) or (e) of the definition of “eligible event” in this subsection only because it occurred after March 21, 2007;

“fair value” means, in respect of property of a corporation, the amount determined in accordance with generally accepted accounting principles that is the fair value of the property to the corporation, expressed in Canadian currency;

“Federal Act” means the Income Tax Act (Canada).

(2) A disposition that is deemed to be made for the purposes of the Federal Act is a disposition for the purposes of this Regulation.

(3) An eligible winding-up of a corporation is considered to be completed for the purposes of this Regulation at the time the corporation is dissolved.

(4) For the purposes of this Regulation and subject to any necessary modifications, unless the context requires otherwise,

  1. references in this Part to corporations shall include partnerships; and
  2. references to taxation years of corporations shall include fiscal periods of partnerships.

Reorganization gain
0.2 For the purposes of this Regulation, the reorganization gain of a corporation for a taxation year in respect of an eligible event or an exempt event, as the case may be, of the corporation means the amount, if any, by which “A” exceeds “B” where,

“A” is the sum of,

  1. the corporation's net income, if any, for the year for the purposes of Part II.1 of the Act, and
  2. the amount, if any, that would be the corporation's net loss for the year for the purposes of Part II.1 of the Act if any decrease in the amount of the net loss for the year from the eligible event or exempt event, as the case may be, were not taken into account, and

“B” is the sum of,

  1. the amount, if any, that would be the corporation's net income for the year for the purposes of Part II.1 of the Act if any increase in the amount of the net income for the year from the eligible event or exempt event, as the case may be, were not taken into account, and
  2. the corporation's net loss, if any, for the year for the purposes of Part II.1 of the Act.

2. The Regulation is amended by adding the following heading immediately before section 1:

Part II
Prescribed amounts for The purposes of subsection 57.4 (1) of the Act

3. (1) Subsection 1 (1) of the Regulation is amended by striking out “section” and substituting “Part” in the portion before the definitions.

(2) The definition of “mark-to-market changes” in subsection 1 (1) of the Regulation is revoked and the following substituted:

“mark-to-market changes” means, with respect to a specified mark-to-market property or excluded mark-to-market property held by a corporation, changes in the fair value of the property that occur after the corporation acquires the property and before the corporation disposes of the property;

(3) Subsection 1 (3) of the Regulation is amended by striking out “within 180 days of the filing of this Regulation” and substituting “before February 26, 2008”.

(4) Subsection 1 (4) of the Regulation is amended by striking out “subclause 57.4 (1) (a) (viii) of the Act” in the portion before paragraph 1 and substituting “subsection 57.4 (1) of the Act”.

(5) Subsection 1 (5) of the Regulation is amended by striking out the portion before paragraph 1 and substituting the following:

(5) The following amounts are prescribed for the purposes of subsection 57.4 (1) of the Act as amounts required to be included in calculating the total amount to be deducted in determining a corporation's adjusted net income for the purposes of Part II.1 of the Act for a taxation year:

. . . . .

(6) Section 1 of the Regulation is amended by adding the following subsection:

(5.1) For the purposes of determining the adjusted net income or adjusted net loss of a corporation for a taxation year during which the corporation is a partner in a partnership, this section applies in determining the adjusted net income or adjusted net loss of the partnership for fiscal periods ending in the taxation year of the corporation only if,

  1. the taxation year ends after March 22, 2007; or
  2. the taxation year begins after June 30, 2004 and ends before March 23, 2007 and the corporation made an election in accordance with subsection (3) to have this section apply to all of the corporation's taxation years beginning after June 30, 2004.

(7) Subsection 1 (12) of the Regulation is revoked.

4. Section 2 of the Regulation is revoked and the following substituted:

Adjusted net income, reorganization gain

2. (1) Each reorganization gain of a corporation for a taxation year in respect of an exempt event is prescribed for the purposes of subsection 57.4 (1) of the Act as an amount required to be included in calculating the total amount to be deducted in determining the corporation's adjusted net income for the purposes of Part II.1 of the Act for the taxation year, but only if the corporation,

  1. has a permanent establishment in Ontario during the year;
  2. satisfies clause 57.2 (1) (a), (b) or (c) of the Act for the year; and
  3. is not exempt from tax under Part II.1 of the Act for the year by reason of section 57.11 of the Act.

(2) For the purposes of determining the adjusted net income or adjusted net loss of a corporation for a taxation year in which the corporation is a partner in a partnership,

  1. the partnership shall not, in determining the partnership's adjusted net income or adjusted net loss for a fiscal period ending in the taxation year of the corporation, deduct an amount in respect of a reorganization gain of the partnership for a fiscal period in respect of an exempt event unless the corporation satisfies clauses (1) (a), (b) and (c) for the taxation year; and
  2. the partnership is not required to satisfy the conditions described in clauses (1) (a), (b) and (c).

5. The Regulation is amended by adding the following Part:

Part III
prior period amounts

Definitions

3. In this Part,

“carrying value” means, in respect of property at a particular time, the value at which the owner of the property carries the property in the owner's books and records for accounting purposes, as determined at that time in accordance with generally accepted accounting principles;

“Ontario Act” means the Corporations Tax Act.

Specified deferred gain

4.(1) The sum of all amounts each of which is a specified deferred gain of a corporation for a taxation year ending after December 31, 1993 from an eligible event in the year, as determined in accordance with this section, is prescribed for the purposes of subsection 57.4 (1) of the Act as an amount required to be included in calculating the total amount to be deducted in determining the corporation's adjusted net income for the purposes of Part II.1 of the Act for the year.

(2) If the eligible event is a disposition referred to in clause (a) of the definition of “eligible event” in subsection 0.1 (1), the specified deferred gain from the eligible event is the lesser of “A” and “B” where,

“A” is the sum of,

  1. the amount of the corporation's reorganization gain for the year in respect of the eligible event, and
  2. all amounts, if any, included in computing the corporation's adjusted net income for the year under section 5 as a result of the eligible event, and

“B” is the sum of all amounts each of which is the carrying value to the corporation, immediately after the eligible event, of the shares or partnership interest, as the case may be, received by the corporation as consideration for the disposition.

(3) If the eligible event is a disposition referred to in clause (b) of the definition of “eligible event” in subsection 0.1 (1), the specified deferred gain from the eligible event is the sum of,

  1. the amount of the corporation's reorganization gain in respect of the eligible event; and
  2. all amounts, if any, included in computing the corporation's adjusted net income for the year under section 5 as a result of the eligible event.

(4) If the eligible event is a disposition referred to in clause (c) of the definition of “eligible event” in subsection 0.1 (1), the specified deferred gain from the eligible event is the lesser of “A” and “C” where,

“A” has the same meaning as in subsection (2), and

“C” is the amount determined under subsection (5) or (6), whichever applies in respect of the disposition.

(5) If the disposition does not involve the replacement of eligible capital property, “C” in subsection (4) is the amount, if any, by which “D” exceeds “E” where,

“D” is the sum of,

  1. the amount that would be included in the corporation's income for the year under subsection 13 (1) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 13 (4) of the Federal Act did not apply to the disposition and the year had ended immediately after the disposition, and
  2. the amount that would be the corporation's capital gain from the disposition for the year, as determined for the purposes of Subdivision B of Division B of Part II of the Act, if subparagraphs 40 (1) (a) (ii) and (iii) of the Federal Act and section 44 of that Act did not apply in respect of the disposition, and

“E” is the amount that would be determined to be “D” if subsection 13 (4) of the Federal Act or section 44 of that Act, whichever is applicable, as it applies for the purposes of the Ontario Act, applied in respect of the disposition and paragraph 44 (1) (e) of the Federal Act were read without reference to subparagraphs (ii) and (iii) of that paragraph.

(6) If subsection (5) does not apply in respect of the disposition, “C” in subsection (4) is the amount, if any, by which “F”, “G” or “H”, whichever applies to the taxation year, exceeds “I” where,

“F” applies if the taxation year ends before February 28, 2000, and is 4/3 of the amount that would be included in the corporation's income under subsection 14 (1) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 14 (6) of the Federal Act did not apply and the year had ended immediately after the disposition,

“G” applies if the taxation year ends after February 27, 2000 but before October 18, 2000, and is the sum of,

  1. 4/3 of the amount that would be included in the corporation's income under paragraph 14 (1) (a) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 14 (6) of the Federal Act did not apply and the taxation year had ended immediately after the disposition, and
  2. 1.5 times the amount that would be included in the corporation's income under paragraph 14 (1) (b) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 14 (6) of the Federal Act did not apply and the taxation year had ended immediately after the disposition,

“H” applies if the taxation year ends after October 17, 2000, and is the sum of,

  1. 4/3 of the amount that would be included in the corporation's income under paragraph 14 (1) (a) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 14 (6) of the Federal Act did not apply and the taxation year had ended immediately after the disposition, and
  2. 2 times the amount that would be included in the corporation's income under paragraph 14 (1) (b) of the Federal Act, as it applies for the purposes of the Ontario Act, in respect of the disposition if subsection 14 (6) of the Federal Act did not apply and the taxation year had ended immediately after the disposition, and

“I” is the amount that would be determined as “F”, “G” or “H”, whichever applies for the taxation year, if subsection 14 (6) of the Federal Act had applied in respect of the disposition.

(7) If the eligible event is the receipt of property referred to in clause (d) of the definition of “eligible event” in subsection 0.1 (1), the specified deferred gain from the eligible event is the lesser of “J” and “K” where,

“J” is the amount of the corporation's reorganization gain in respect of the eligible event, and

“K” is the amount, if any, by which the fair market value of the shares of the other corporation cancelled on the winding-up exceeds the sum of all amounts described in subparagraph 88 (1) (a) (iii) of the Federal Act, as it applies for the purpose of the Ontario Act, in respect of the cancellation of those shares.

(8) If the eligible event is a receipt of property referred to in clause (e) of the definition of “eligible event” in subsection 0.1 (1), the specified deferred gain from the eligible event is the lesser of “J” and “L” where,

“J” has the same meaning as in subsection (7), and

“L” is the amount by which the fair market value of all property received by the new corporation from the predecessor corporations on the amalgamation exceeds the total cost amount under the Federal Act, as that Act applies for the purposes of the Ontario Act, of the new corporation's property immediately after the amalgamation.

Recapture of specified deferred gain

5.(1) In this section,

“excluded disposition” means,

  1. an exchange to which subsection 51 (1) of the Federal Act applies,
  2. a disposition on an eligible amalgamation or eligible winding-up,
  3. a disposition in respect of which proceeds of disposition are determined under paragraph 47 (1) (a) of the Federal Act, or
  4. any other disposition of property in respect of which proceeds of disposition for the purposes of the Federal Act are determined under a specific provision of the Federal Act which permits or requires proceeds of disposition to be less than the amount that would be determined without reference to the specific provision, but not a disposition,
    1. that is or is part of an eligible event in respect of the corporation that disposes of the property, or
    2. in respect of which proceeds of disposition are reduced because of paragraph (j) of the definition of “proceeds of disposition” in section 54 of the Federal Act.

(2) Subsection (3) applies if,

  1. a specified deferred gain was included under subsection 4 (1) in calculating the total amount deducted in determining a corporation's adjusted net income for the purposes of Part II.1 of the Act for a taxation year in respect of an eligible event referred to in clause (a) of the definition of “eligible event” in subsection 0.1 (1) which was or included the disposition of a particular property;
  2. before March 22, 2007, the corporation subsequently disposed of all or part of the shares or partnership interest, as the case may be, received as consideration on the disposition of the particular property;
  3. the subsequent disposition is not an excluded disposition; and
  4. the corporation continuously held the shares or partnership interest or the part of the partnership interest or shares that were disposed of on the subsequent disposition from the time of the eligible event until the subsequent disposition.

(3) For the purposes of subsection 57.4 (1) of the Act, if the conditions set out in clauses (2) (a), (b), (c) and (d) are satisfied, the corporation must include in determining its adjusted net income for the purposes of Part II.1 of the Act for the taxation year in which the subsequent disposition occurs the amount, if any, in respect of the eligible event calculated using the formula,

(A – B) × C/D

in which,

“A” is the amount of the specified deferred gain in respect of the eligible event that was previously included under subsection 4 (1) in the total amount deducted in determining a corporation's adjusted net income for a taxation year for the purposes of Part II.1 of the Act,

“B” is,

  1. if the subsequent disposition involves the disposition of one or more shares, the lesser of,
    1. the total amount deemed under subsection 84 (3) of the Federal Act to be received by the corporation in respect of the disposition of the shares, and
    2. the total amount deductible by the corporation under subsection 112 (1) or (2) of the Federal Act or subsection 138 (6) of that Act in respect of the total amount described in subclause (i), or
  2. if no shares are disposed of on the subsequent disposition, zero,

“C” is the carrying value to the corporation, immediately after the eligible event, of the shares or partnership interest or the part of the shares or partnership interest that were disposed of on the subsequent disposition, and

“D” is the carrying value to the corporation, immediately after the eligible event, of all the shares or partnership interest received on the eligible event as consideration for the disposition of the particular property.

(4) Subsection (5) applies if,

  1. a specified deferred gain was included under subsection 4 (1) in calculating the total amount deducted in determining a corporation's adjusted net income for the purposes of Part II.1 of the Act for a taxation year in respect of an eligible event referred to in clause (c) of the definition of “eligible event” in subsection 0.1 (1) which was or included the disposition of a particular property;
  2. before March 22, 2007, the corporation subsequently disposed of all or part of the property acquired in replacement of the particular property;
  3. the subsequent disposition is not an excluded disposition; and
  4. the corporation continuously held the replacement property that was disposed of on the subsequent disposition until the subsequent disposition.

(5) For the purposes of subsection 57.4 (1) of the Act, if the conditions set out in clauses (4) (a), (b), (c) and (d) are satisfied, the corporation must include in determining its adjusted net income for the purposes of Part II.1 of the Act for the taxation year in which the subsequent disposition occurs the amount in respect of the eligible event calculated using the formula,

E × F/G

in which,

“E” is the amount of the specified deferred gain in respect of the eligible event that was previously included under subsection 4 (1) in the total amount deducted in determining a corporation's adjusted net income for the purposes of Part II.1 of the Act,

“F” is the fair market value, as of the time of the eligible event or the time it was first acquired by the corporation after the eligible event, as the case may be, of the replacement property that is disposed of on the subsequent disposition, and

“G” is the fair market value, as of the time of the eligible event or the time it was first acquired after the eligible event, as the case may be, of all property acquired in replacement of the particular property.

(6) Subsection (7) applies if,

  1. a specified deferred gain was included under subsection 4 (1) in calculating the total amount deducted in determining a particular corporation's adjusted net income for the purposes of Part II.1 of the Act for a taxation year in respect of an eligible event referred to in clause (a) or (b) of the definition of “eligible event” in subsection 0.1 (1) which was or included the disposition of a particular property;
  2. before March 22, 2007, another corporation (in this subsection and subsection (7) referred to as the “recipient corporation”) disposed of the particular property;
  3. the particular corporation and the recipient corporation did not deal with each other at arm's length immediately before or immediately after the eligible event;
  4. the subsequent disposition by the recipient corporation is not an excluded disposition; and
  5. the recipient corporation continuously held the particular property from the time of the eligible event until the subsequent disposition.

(7) For the purposes of subsection 57.4 (1) of the Act, if the conditions set out in clauses (6) (a), (b), (c), (d) and (e) are satisfied, the recipient corporation must include in determining its adjusted net income for the purposes of Part II.1 of the Act for the taxation year in which the subsequent disposition occurs the amount, if any, by which “H” exceeds “I” where,

“H” is the amount of the specified deferred gain in respect of the disposition by the particular corporation of the particular property that was previously included under subsection 4 (1) in the total amount deducted in determining the particular corporation's adjusted net income for the purposes of Part II.1 of the Act, and

“I” is,

  1. if the particular property is shares, the lesser of,
    1. the total amount deemed under subsection 84 (3) of the Federal Act to be received by the recipient corporation in respect of the subsequent disposition of the shares, and
    2. the total amount deductible by the recipient corporation under subsection 112 (1) or (2) of the Federal Act or subsection 138 (6) of that Act in respect of the total amount described in subclause (i), or
  2. if the particular property does not consist of shares, zero.

(8) Subsection (9) applies if,

  1. a specified deferred gain was included under subsection 4 (1) in calculating the total amount deducted in determining a corporation's adjusted net income for the purposes of Part II.1 of the Act for a taxation year in respect of an eligible event referred to in clause (d) or (e) of the definition of “eligible event” in subsection 0.1 (1);
  2. before March 22, 2007, the corporation disposed of a property acquired on the eligible event;
  3. the disposition referred to in clause (b) is not an excluded disposition; and
  4. the corporation continuously held the property from the time of the eligible event until the disposition.

(9) For the purposes of subsection 57.4 (1) of the Act, if the conditions set out in clauses (8) (a), (b), (c) and (d) are satisfied, the corporation must include in determining its adjusted net income for the purposes of Part II.1 of the Act for the taxation year in which the disposition occurs the amount, if any, calculated using the formula,

(J × K/L) – M

in which,

“J” is the amount of the specified deferred gain in respect of the eligible event that was previously included under subsection 4 (1) in the total amount deducted in determining the particular corporation's adjusted net income for the purposes of Part II.1 of the Act,

“K” is the amount, if any, by which the carrying value of the property immediately after the eligible event exceeds the carrying value of the property immediately before the eligible event,

“L” is the sum of all amounts each of which is the amount, if any, by which the carrying value, immediately after the eligible event, of a property acquired on the eligible event exceeds its carrying value immediately before the eligible event, and

“M” is,

  1. if the property is shares, the lesser of,
    1. the total amount deemed under subsection 84 (3) of the Federal Act to be received by the corporation in respect of the disposition of the shares, and
    2. the total amount deductible by the corporation under subsection 112 (1) or (2) of the Federal Act or subsection 138 (6) of that Act in respect of the total amount described in subclause (i), or
  2. if the property does not consist of shares, zero.

(10) If property of a particular corporation becomes the property of another corporation (referred to in this subsection as the “recipient”) as a result of an eligible winding-up of the particular corporation or an eligible amalgamation of the particular corporation with one or more other corporations, the recipient shall be deemed for the purposes of subsections (2), (3), (4), (5), (6), (7), (8) and (9) to be the same corporation as, and a continuation of, the particular corporation.

Eligible amalgamation and eligible winding-up

6.(1) In this section,

“designated corporation” means, with respect to a particular corporation,

  1. a corporation that amalgamated with one or more other corporations to form the particular corporation, if the amalgamation is an eligible amalgamation,
  2. a corporation that winds up into the particular corporation in circumstances to which subsection 88 (1) of the Federal Act applies, or
  3. a corporation that is a designated corporation with respect to a corporation that is itself a designated corporation with respect to the particular corporation.

(2) If there has been an eligible amalgamation after December 31, 1993 and before March 22, 2007 of one or more designated corporations, the new corporation formed as a result of the eligible amalgamation must include in determining its adjusted net income for the purposes of Part II.1 of the Act for its first taxation year the lesser of,

  1. the sum of all amounts, if any, each of which is an investment loss of a particular designated corporation in respect of the new corporation,
    1. from an investment in shares or debt issued by another corporation that is also a designated corporation with respect to the new corporation, and
    2. for a taxation year in which the particular designated corporation at any time controlled the other corporation that issued the shares or debt; and
  2. the amount that would be the other corporation's eligible losses under subsection 57.5 (5) of the Act for its taxation year beginning at the time of the amalgamation if,
    1. the other corporation had continued to exist after the eligible amalgamation,
    2. subsection 57.5 (5) of the Act were read without reference to clause (b) of that subsection, and
    3. subsection 57.5 (7) of the Act did not apply.

(3) The investment loss of a corporation for a taxation year from one or more of its investments in shares or debt issued by another corporation means the amount, if any, by which “A” exceeds “B” where,

“A” is the sum of,

  1. the corporation's net loss, if any, for the year for the purposes of Part II.1 of the Act, and
  2. the amount, if any, that would be the corporation's net income for the year for the purposes of Part II.1 of the Act if the corporation's net income for the year were not affected by any reduction of that net income attributable to a reduction in the fair value of those investments, and

“B” is the sum of,

  1. the amount, if any, that would be the corporation's net loss for the year for the purposes of Part II.1 of the Act if the corporation's net loss for the year were not affected by any increase of that net loss attributable to a reduction in the fair value of those investments, and
  2. the corporation's net income for the year for the purposes of Part II.1 of the Act.

(4) If an eligible winding-up of a designated corporation (in this subsection called the “subsidiary”) is completed after December 31, 1993 and before March 22, 2007, the particular corporation into which the subsidiary is wound up must include in determining its adjusted net income for the purposes of Part II.1 of the Act for its first taxation year referred to in subsection 88 (1) of the Federal Act that commences after the commencement of the winding-up the lesser of,

  1. the sum of,
    1. the investment loss of the particular corporation from one or more of its investments in shares or debt issued by the subsidiary for the particular corporation's first taxation year commencing after the commencement of the winding-up or for a previous taxation year, and
    2. all amounts each of which is the investment loss of another corporation that is a designated corporation in respect of the particular corporation from one or more of that designated corporation's investments in shares or debt issued by the subsidiary for a taxation year ending before the particular corporation's first taxation year commencing after the winding-up; and
  2. the amount that would be the subsidiary's eligible losses under subsection 57.5 (5) of the Act for its first taxation year beginning after the commencement of the eligible winding-up if,
    1. the subsidiary had continued to exist after the eligible winding-up,
    2. subsection 57.5 (5) of the Act were read without reference to clause (b) of that subsection, and
    3. subsection 57.5 (7) of the Act did not apply.

(5) For the purposes of subsections (2), (3) and (4), shares and debt issued by a designated corporation are deemed to be debt and shares issued by the particular corporation formed as a result of an eligible amalgamation of the designated corporation with one or more other designated corporations, and the particular corporation shall be deemed to be the same corporation as, and a continuation of, the designated corporation for the purposes of determining an investment loss from shares or debt issued by the particular corporation.

(6) References in this section to provisions of the Act are references to those provisions as they read,

  1. (a) for the purposes of clause (2) (b), immediately after the eligible amalgamation; and
  2. for the purposes of clause (4) (b), immediately after the completion of the eligible winding-up.

6.This Regulation is deemed to have come into force on August 27, 2007.

Appendix:
Explanatory Material on the Consultation Draft

This explanatory material is organized as follows:

  • section1 contains an overview of Ontario's corporate minimum tax;
  • section 2 summarizes the amendments proposed in the consultation draft (the “Proposed Amendments”); and
  • section 3 provides detailed clause-by-clause notes with regard to the Proposed Amendments.

1. Overview of Ontario's Corporate Minimum Tax

Ontario's corporate minimum tax (“OCMT”) is designed to subject medium and large-sized corporations carrying on business in Ontario to a minimum level of tax in connection with operations that are profitable for accounting purposes. It is designed to apply only to corporations benefiting from significant income tax preferences.

Small corporations are exempt from the OCMT -- the OCMT only applies to corporations (or groups of associated corporations) with more than $5 million of assets or annual revenue of more than $10 million.1

The amount of a corporation's gross OCMT for a taxation year2 is generally equal to 4% of the product of its adjusted net income for the year3 and its Ontario allocation factor for the year4. A corporation's OCMT for a taxation year is its gross OCMT for the year minus the amount of its Ontario income tax for the year and its foreign tax credit for CMT purposes for the year.

Income tax preferences typically arise for corporations where amounts are claimed more rapidly as a deduction for income tax purposes than for accounting purposes. In order to avoid penalizing corporations for using income tax preferences of this nature, a corporation's OCMT for a taxation year generates equivalent tax credits that can be carried forward up to 10 or 20 taxation years.5 These tax credits reduce income tax for a subsequent taxation year, to the extent that the corporation's income tax for the subsequent year exceeds its gross OCMT for the subsequent year.

The OCMT also has been designed to provide for the equitable treatment of accounting losses, as adjusted for OCMT purposes. These losses for a taxation year may be carried forward up to 10 or 20 taxation years6 in order to reduce the amount on which the OCMT is based.

As noted above, a corporation's gross OCMT for a taxation year is based on its adjusted net income. The starting point for a corporation's adjusted net income for a taxation year is its net income for the year under generally accepted accounting principles, determined before income taxes and without reference to the consolidation and equity methods of accounting.7 Amounts are added to, and subtracted from, the corporation's net income to arrive at its adjusted net income, including amounts authorized to be determined by regulation.8

In Ontario Regulation 509/07 under the CTA, a number of adjustments are made with regard to the application of “mark-to-market” accounting rules.9 Under this Regulation:

  • For taxation years ending after March 22, 2007, a corporation's adjusted net income is reduced to reflect “paper” gains related to assets and recognized for accounting purposes unless the same gains are recognized for income tax purposes.10 Likewise, a corporation's adjusted net income is increased to reflect “paper” losses associated with such assets.11 The cumulative net “paper” gains and losses are instead recognized after the disposition of such assets by increasing12 or reducing13, as the case may be, the corporation's adjusted net income by the corporation's gains and losses for income tax purposes recognized as a result of the disposition of such assets.
  • The rules set out above also apply to a corporation's taxation years beginning after June 30, 2004 and ending before March 23, 2007, where the corporation has so elected before February 26, 200814 under Ontario Regulation 509/07.15

2. Summary of Proposed Amendments

The consultation draft contains proposed amendments (the “Proposed Amendments”) to Ontario Regulation 509/07. The Proposed Amendments would:

  • implement announcements in the 2007 Ontario Budget made with regard to the treatment under the OCMT of corporate reorganizations,
  • give effect to Tax Legislation Bulletin Number 96-1R (entitled “Treatment of Corporate Reorganizations under the Corporate Minimum Tax”), and16
  • make technical changes to the mark-to-market rules in Ontario Regulation 509/07.

The measures in the Proposed Amendments applying on a continuing basis to corporate reorganizations may be summarized as follows:

A1. Accounting gains17, if any, associated with a number of “exempt events” that occur after March 21, 2007 are excluded in computing a corporation's adjusted net income.18 These “exempt events” are:

  • dispositions of property governed by section 85 or 85.1 or subsection 97(2) of the federal Income Tax Act (the “Federal Act”) or the replacement property rules of the Federal Act, where an applicable Ontario election is made, and
  • the receipt of property on amalgamations to which section 87 of the Federal Act applies and on windings-up to which subsection 88(1) of the Federal Act applies.

A2. The exclusion described in paragraph A1 does not apply to a corporation for a taxation year if, for any reason, it is exempt from the OCMT for the year.19

A3. The accounting gains described in paragraph A1 are not subject to the recapture rules for specified deferred gains (“SDGs”).

The new measures in the Proposed Amendments relating to the application of the OCMT rules to past corporate reorganization may be summarized as follows:

B1. SDGs associated with a number of “eligible events” that occur before March 22, 2007 are excluded from a corporation's adjusted net income. Except for the timing, an “eligible event” is generally the same as an “exempt event”.

B2. With regard to pre-March 22, 2007 rollovers under sections 85 and 85.1 and subsection 97(2) of the Federal Act that qualify as eligible events, the SDG is equal to the lesser of:

  • the total of the corporation's accounting gain associated with the eligible event and, if the eligible event gives rise to recapture of a previous SDG (as described below), the amount of that recapture, and
  • the carrying value20 to the corporation immediately after the eligible event of the shares or the partnership interest, as the case may be, received by the corporation as consideration for the rollover.21

B3. With regard to a pre-March 22, 2007 rollover by a corporation to a foreign bank that qualifies as an eligible event, the SDG is equal to the total of the corporation's accounting gain associated with the eligible event and, if the eligible event gives rise to recapture of a previous SDG (as described below), the amount of that recapture.

B4. With regard to a pre-March 22, 2007 disposition of a property (other than eligible capital property) that is an eligible event because other property is acquired to replace the property, the SDG is equal to the lesser of:

  • the total of the corporation's accounting gain associated with the eligible event and, if the eligible event gives rise to recapture of a previous SDG (as described below), the amount of that recapture, and
  • the total capital gain and recapture of capital cost allowance deferred under the Federal Act as a consequence of the replacement property rules in the Federal Act applying to the eligible event.22

B5. With regard to a pre-March 22, 2007 disposition of eligible capital property that is an eligible event because other property is acquired to replace the property and that occurs in a taxation year ending after February 27, 2000, the SDG is equal to the lesser of:

  • the total of the corporation's accounting gain associated with the eligible event and, if the eligible event gives rise to recapture of a previous SDG (as described below), the amount of that recapture, and
  • the total of 4/3 of the income deferred under paragraph 14(1)(a) of the Federal Act as a consequence of the replacement property rules under the Federal Act and two times23 the income deferred under paragraph 14(1)(b) of the Federal Act as a consequence of those rules.24

B6. With regard to a disposition of eligible capital property that is an eligible event because other property is acquired to replace the property and that occurs in a taxation year ending before February 28, 2000, the SDG is equal to the lesser of:

  • the total of the corporation's accounting gain associated with the eligible event and, if the eligible event gives rise to recapture of a previous SDG (as described below), the amount of that recapture, and
  • 4/3 of the income deferred under subsection 14(1) of the Federal Act as a consequence of the replacement property rules under the Federal Act.25

B7. With regard to an eligible event that is the receipt of property on a pre-March22, 2007 winding-up to which subsection 88(1) of the Federal Act applies, the SDG is equal to the lesser of:

  • the parent corporation's accounting gain in respect of the eligible event, and
  • the amount, if any, by which the fair market value of the shares of the subsidiary cancelled on the winding-up exceeds the total cost amount of the subsidiary's properties transferred in connection the cancellation of those shares.26

B8. With regard to an eligible event that is the receipt of property on a pre-March22, 2007 amalgamation to which section 87 of the Federal Act applies, the SDG is equal to the lesser of:

  • the new corporation's accounting gain in respect of the eligible event, and
  • the amount, if any, by which the fair market value of all property received by the new corporation from the predecessor corporations on the amalgamation exceeds the cost amount under the Federal Act of the new corporation's property immediately after the amalgamation.

B9. SDGs are generally recaptured (i.e., added in the computation of a corporation's adjusted net income) on a subsequent disposition of property that occurs before March 22, 2007. For this purpose, a subsequent disposition does not include a disposition of property on an amalgamation or winding-up to which section 87 or subsection 88(1) of the Federal Act applies.27 There are four rules governing the calculation of SDG recapture.

B10. The first rule applies where an SDG was determined under paragraph B2 in respect of a transferor and the transferor subsequently disposes of the shares or partnership interest, as the case may be, acquired in consideration for the transfer.28 The SDG recapture in this case applies to the transferor for the taxation year in which the subsequent disposition occurred.29

B11. The second rule applies where an SDG was determined under any of paragraphs B4 to B6 in respect of a corporation's replacement property and the replacement property is subsequently disposed of.30 The SDG recapture in this case applies to the corporation for the taxation year in which the replacement property is disposed of.31

B12. The third rule applies where an SDG was determined under paragraph B2 or B3 in respect of a transferor of a property and the original transferee subsequently disposes of the same property.32 The SDG recapture in this case applies to the original transferee for the taxation year in which the property is subsequently disposed.33

B.13 The last rule applies where an SDG is determined under paragraph B7 or B8 on the receipt of a property on an amalgamation or winding-up.34 The SDG in respect of the eligible event is recaptured on a subsequent disposition of the property, to the extent that the specified gain was associated with the property.35

B14. For amalgamations and windings-up completed before March 22, 2007, special rules are provided to prevent the double counting of losses for OCMT purposes as a consequence of the recognition of investment losses for accounting purposes and OCMT rules under which a newly-amalgamated corporation (or a parent corporation) can have access to the unused OCMT eligible losses of its predecessors or subsidiary.36 The rules do not apply to transactions after March 21, 2007 because of proposals in the 2007 Ontario budget to change the OCMT legislation to address the double counting.37

3. Explanatory Notes

Definitions and Interpretation

0.1(1)
“eligible amalgamation”
“eligible winding-up”

There are references throughout the Proposed Amendments to “eligible amalgamations” and “eligible windings-up”. Accounting gains from eligible amalgamations and eligible windings-up occurring after March 21, 2007 are excluded from adjusted net income under subsection 2(1) of the Proposed Amendments. In addition, the recapture of SDGs is not triggered under section 538 by an eligible amalgamation or eligible winding-up.

An “eligible amalgamation” is an amalgamation or merger of two or more corporations in circumstances to which section 87 of the Federal Act applies. An “eligible winding-up” of a corporation means a winding-up of the corporation in circumstances to which subsection 88(1) of the Federal Act applies.

0.1(1)
“eligible event”
“exempt event”

Under subsection 4(1) of the Proposed Amendments, all or part of an accounting gain associated with an “eligible event” is excluded from a corporation's adjusted net income for OCMT purposes. Under subsection 2(1), accounting gains associated with an “exempt event” are likewise generally ignored for OCMT purposes.

Each of the following pre-March 22, 2007 transactions and events is defined as an “eligible event” in respect of a corporation or partnership:

  • a disposition by it of a property that is an eligible property for the purposes of subsection 85(1) of the Federal Act, if a joint election under the Federal Act is made under that subsection and the corresponding election is made under section 57.9 of the CTA; [subclause (a)(i) of the definition]
  • a disposition by it under subsection 85(2) of the Federal Act, if a joint election under the Federal Act is made under that subsection and the corresponding election is made under section 57.9 of the CTA; [subclause (a)(ii) of the definition]
  • a disposition by it of a share of the capital stock of a taxable Canadian corporation in circumstances to which section 85.1 applies if a joint election is made under section 57.9 of the CTA; [subclause (a)(iii) of the definition]
  • a disposition by it of property on a rollover to which subsection 97(2) of the Federal Act applies if the disposition is the subject of a joint election under that subsection and under section 57.9 of the CTA; [subclause (a)(iv) of the definition]
  • a disposition by it in circumstances to which subsection 142.7(3) of the Federal Act applies, if the disposition was the subject of a joint election under that subsection and under section 57.9.1 of the CTA; [clause (b) of the definition]
  • a disposition by it if the proceeds of disposition are determined under subsection 13(4) or 14(6) or section 44 of the Federal Act and the disposition is the subject of an election under section 57.10 of the CTA; [clause (c) of the definition]
  • the receipt by it of property described in paragraph 88(1)(a) of the Federal Act in connection with an eligible winding-up completed before March 22, 2007, or [clause (d) of the definition]
  • the receipt by it of property as a consequence of an amalgamation before March 22, 2007 to which section 87 of the Federal Act applies. [clause (e) of the definition]

An “exempt event” is defined in the same way as an “eligible event” except that “exempt event” is defined with reference to post-March 21, 2007 transactions. An “exempt event” also does not include a disposition referred to in clause (b) of the definition of “eligible event”, since such dispositions occurred only before March 22, 2007.

As to the application of the definition to partnerships, see further the notes on subsection 0.1(4) of the Proposed Amendments.

0.1(1)
“fair value”

Fair value adjustments with respect to assets held by corporations are generally ignored for OCMT purposes unless the same adjustments are made for income tax purposes, due to the reference to “fair value” in the definition of “mark-to-market changes” in section 1 of the Proposed Amendments.

The proposed definition of the “fair value” of an asset refers to the asset's “fair value” under generally accepted accounting principles (“GAAP”), as determined in Canadian dollars.

0.1(2)

Under clause 1(1)(a) of the CTA, the definition of “disposition” in the Federal Act applies for the purposes of the CTA. The status of transactions that are deemed dispositions for the purposes of the Federal Act (e.g., the deemed disposition of identical property under paragraph 47(1)(a) of the Federal Act) is not entirely clear.

Subsection 0.1(2) of the Proposed Amendments ensures that the federal deemed disposition rules also apply for the purposes of the Proposed Amendments. However, under section 4 of the Proposed Amendments, a deemed disposition under paragraph 47(1)(a) of the Federal Act would not trigger OCMT consequences.39

0.1(3)

Windings-up completed after March 21, 2007 are subject to the rules in Part II of the Proposed Amendments. Earlier windings-up are subject to the rules in Part III of the Proposed Amendments.

Under subsection 0.1(3) of the Proposed Amendments, a winding-up of a corporation is considered to be completed at the time the corporation is dissolved.

0.1(4)

This measure provides that, unless the context requires otherwise and with such modifications as may be required, references to corporations include references to partnerships and references to taxation years include references to fiscal periods. The measure is consistent with the scheme of the OCMT rules for partnerships reflected in subsections 57.4(3) and (4) of the CTA. Under these rules, adjusted net income for OCMT purposes is calculated at the partnership level and flowed-through proportionally to partners.

Similarly, in these notes, unless the context otherwise requires, references to corporations and their taxation years should be read as including references to partnerships and their fiscal periods.

0.2

Under section 0.2 of the Proposed Amendments, a corporation's “reorganization gain” in respect of an eligible event or exempt event is the amount, if any, by which the sum of:

  • the corporation's net income for OCMT purposes, and
  • the amount that would be the corporation's net loss for OCMT purposes if any decrease in the amount thereof from the eligible event or exempt event were not taken into account

exceeds the sum of,

  • the amount that would be the corporation's net income for the year for OCMT purposes if any increase in the amount thereof from the eligible event or the exempt event were not taken into account, and
  • the corporation's net loss for the year for OCMT purposes.

Example 1

A corporation subject to OCMT realizes a $1,000 gain for accounting purposes on a transfer of a property in 2008 to another corporation in circumstances to which section 85 of the Federal Act and section 57.9 of the CTA applies. What would be the corporation's “reorganization gain” in respect of that transfer, assuming that the corporation uses calendar years as its taxation years and the corporation's net income for OCMT purposes is equal to $200?

Analysis:

1. For the purposes of clause 0.2 “A” (a) of the Proposed Amendments, the corporation's net income for 2008 is equal to $200.

2. For the purposes of clause 0.2“A”(b), the amount that would be the corporation's net loss for that year if the $1,000 gain were ignored is $800 ($1,000 - $200).

3. For the purposes of clause 0.2“B”(a), the corporation's net income if the $1,000 gain were ignored is nil.

4. For the purposes of clause 0.2“B”(b), the corporation's net loss for that year is also nil.

5. Consequently, the corporation's “reorganization gain” for that year in respect of the rollover is equal to $1,000 (i.e., $200 + $800).

6. The corporation's reorganization gain is deducted in computing its adjusted net income pursuant to subsection 2(1) of the Proposed Amendments.

Continuing Adjustments

1

The Proposed Amendments also include minor changes to Ontario Regulation 509/07 in relation to the operation of the “mark-to-market rules” for OCMT purposes. The mark-to-market rules in section 1 apply to taxation years ending after March 22, 2007, except where a corporation elects to have the rules also apply to taxation years beginning after June 30, 2004 and ending before March 23, 2007.

The three substantive changes to this section are those summarized below.

As earlier described, “mark-to-market changes” in respect of “specified mark-to-market property” reduce or increase a corporation's adjusted net income.

The definition is amended so that “mark-to-market changes” are determined with references to changes in “fair value” for GAAP purposes and not changes in “fair market value”. Typically, a property's “fair value” and “fair market value” coincide. However, since “fair value” is the expression used for accounting purposes, it is appropriate that it also be used in the context of OCMT rules which are based on GAAP calculations.

The definition is also amended to clarify that “mark-to-market changes” only include fair value changes occurring prior to the disposition of a property.

The Proposed Amendments also clarify the operation of the “mark-to-market” rules in relation to partnerships. Pursuant to subsection 0.1(4) of the Proposed Amendments and subsections 57.4(3) and (4) of the CTA, the “mark-to-market” rules apply at the partnership level and a partner's share of a partnership's adjusted net income is flowed-through on a proportional basis to the partner. Under subsection 1(5.1) of the Proposed Amendments, the election in subsection 1(3) to apply the “mark-to-market” rules for earlier taxation years for the purposes of computing the partner's share of adjusted net income is one made at the partner level rather than at the partnership level. Consequently, the mark-to-market adjustments (calculated at the partnership level) would be flowed-through for earlier taxation years to electing partners but not to other partners.

2(1)

Subsection 2(1) of the Proposed Amendments provides for a reduction in computing a corporation's adjusted net income in respect of a corporate reorganization. The adjustment is illustrated in Example1, above. Its effect is to reduce a corporation's adjusted net income to the extent that it would otherwise reflect a “reorganization gain” in respect of an exempt event. For further detail, see the notes on the definition of “exempt event” in subsection 0.1(1) and on section0.2. However, this adjustment is made for a taxation year only if three restrictions are satisfied:

  • the corporation has a permanent establishment in Ontario during the year,
  • the corporation satisfies one of the size tests ($5 million total assets or $10 million gross revenue) in clause 57.2(1)(a), (b) or (c) for the year, and
  • the corporation is not exempt from OCMT because of section 57.11 of the Act.

Typically, the limitation on the application of this adjustment would have no practical consequence. However, in the event that a corporation's tax status for OCMT changes, this limitation simplifies the administration of the OCMT in connection with the calculation of OCMT loss carryforwards.

Subsection 2(2) of the Proposed Amendments provides special rules that apply to a corporation that is a member of a partnership. The three restrictions that would, pursuant to subsection 0.1(4) and 2(1) of the Proposed Amendments and subsection 57.4(4) of the Act, otherwise apply at the partnership level, do not apply at the partnership level because of clause 2(2)(a). Pursuant to clause 2(2)(b), these three restrictions instead apply at the partner level.

Prior Period Amounts

3 to 6
Overview

Sections 3 to 6 of the Proposed Amendments provide for a number of adjustments in connection with pre-March 22, 2007 transactions.

Under section 4 of the Proposed Amendments, SDGs associated with eligible events are excluded from a corporation's adjusted net income.

Under section 5 of the Proposed Amendments, there is an inclusion in a corporation's adjusted net income that has the effect of recapturing the exclusion determined under section 4.

Under section 6 of the Proposed Amendments, rules are introduced to address the double counting of losses for OCMT purposes on an amalgamation or winding-up.

3
“carrying value”

A property's “carrying value” is the value at which it is carried in the owner's books and records for GAAP purposes. The expression is used in the SDG recapture rules in section5 of the Proposed Amendments.

4(1)

Under subsection 4(1) of the Proposed Amendments, a corporation's SDG for a taxation year in respect of an eligible event is deducted in computing the corporation's adjusted net income for OCMT purposes. A corporation's SDG is calculated under subsections 4(2) to (8).

4(2) to (8)

Pre-March 22, 2007 Ordinary Rollovers

A transferor corporation's SDG for an “eligible event” described in clause (a) of the definition of “eligible event” is determined under subsection 4(2) of the Proposed Amendments. Clause (a) of the definition refers to pre-March 22, 2007 rollovers under subsections 85(1) and (2), section 85.1 and subsection 97(2) of the Federal Act in respect of which an election under section 57.9 of the CTA has also been made.

Under subsection 4(2) of the Proposed Amendments, the transferor corporation's SDG in respect of this sort of eligible event is the lesser of two amounts. The first amount is the total of the corporation's “reorganization gain” in respect of the eligible event (i.e., generally its accounting gain) and, where the eligible event results in an SDG recapture pursuant to section5, the amount of that recapture. The second amount is the total “carrying value”, immediately after the eligible event of the shares or partnership interest received by the corporation in consideration for property transferred on the eligible event.

Pre-March 22, 2007 Rollovers from Canadian Affiliate to Foreign Bank

A transferor corporation's SDG for an “eligible event” described in clause (b) of the definition of “eligible event” is determined under subsection 4(3) of the Proposed Amendments. Clause (b) of that definition refers to pre-March 22, 2007 rollovers under subsection 142.7(3) of the Federal Act in respect of which an election under section 57.9.1 of the CTA has also been made.

Under subsection 4(3) of the Proposed Amendments, the transferor corporation's SDG in respect of this sort of eligible event is the total of the corporation's “reorganization gain” in respect of the eligible event (i.e., generally its accounting gain) and, where the eligible event results in an SDG recapture pursuant to section 5, the amount of that recapture.

Pre-March 22, 2007 Replacement Property Transactions

A corporation's SDG in respect of an “eligible event” described in clause (c) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments is determined under subsection 4(4). Clause (c) of that definition refers to pre-March 22, 2007 rollovers to which replacement property rules in the Federal Act applies, where the rollover has been subject to an election under section 57.10 of the CTA.

Under subsections 4(4) to (6) of the Proposed Amendments, in this case the corporation's SDG is equal to the lesser of the two amounts. The first amount is the total of the corporation's “reorganization gain” on the disposition of the property and the amount of any SDG recapture under section 5 on the disposition. The second amount is intended to reflect the gain calculated under the Federal Act (determined without any adjustment for the 50%, 66.6% or 75% inclusion rates associated with capital property or eligible capital property) that has been exempted by the replacement property rules. The calculation of the second amount is modified to reflect past changes to the capital gains inclusion rates and the rules governing eligible capital property.

More specifically, the second amount determined in respect of an eligible event in a taxation year is equal to,

  • where the relevant property is capital property, the recapture of capital cost allowance and capital gain under the CTA that has been avoided because of the application of the replacement property rules, or
  • where the relevant property is eligible capital property,
    • if the year ended before February 28, 2000, 4/3rds of the Ontario income amount that has been avoided pursuant to subsection 14(1) of the Federal Act because of the application of the replacement property rules,
    • if the year ended after February 27, 2000 and before October 18, 2000, 4/3rds of the Ontario income amount that has been avoided pursuant to paragraph 14(1)(a) of the Federal Act because of the application of the replacement property rules plus 1.5 times the Ontario income amount avoided pursuant to paragraph 14(1)(b) of the Federal Act because of the application of the replacement property rules, or
    • if the year ended after October 18, 2000, 4/3rds of the Ontario income amount avoided pursuant to paragraph 14(1)(a) of the Federal Act because of the application of the replacement property rules plus two times the Ontario income amount avoided pursuant to paragraph 14(1)(b) of the Federal Act because of the application of the replacement property rules.

Pre-March 22, 2007 Windings-up

A corporation's SDG in respect of an “eligible event” described in clause (d) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments is determined under subsection 4(7). Clause (d) of that definition refers to pre-March 22, 2007 windings-up to which subsection 88(1) of the Federal Act applies.

Under subsection 4(7) of the Proposed Amendments, a corporation's SDG in this case is equal to the lesser of the corporation's “reorganization gain” in respect of the eligible event and a second amount. The second amount is equal to the amount, if any, by which, the fair market value of the subsidiary's shares cancelled on the winding-up exceeds the cost amount of the subsidiary's properties referred to subparagraph 88(1)(a)(iii) of the Federal Act associated with the cancellation of the shares.

Pre-March 22, 2007 Amalgamations

A corporation's SDG in respect of an “eligible event” described in clause (e) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments is determined under subsection 4(8). Clause (e) of the definition refers to amalgamations to which section 87 of the Federal Act applies.

Under subsection 4(8) of the Proposed Amendments, a new corporation's SDG is equal to the lesser of the new corporation's “reorganization gain” in respect of the amalgamation and a second amount. The second amount is equal to the amount, if any, by which the fair market value of property received on the amalgamation exceeds the cost amount of such property immediately after the amalgamation.

5(1)

The SDG recapture rules in subsections 5(2) to (9) of the Proposed Amendments are not triggered by an “excluded disposition”, as defined in subsection 5(1).

An “excluded disposition” is defined as:

  • an exchange to which subsection 51(1) of the Federal Act applies,
  • a disposition on an eligible amalgamation or eligible winding-up,
  • a deemed disposition pursuant to the identical property rules in paragraph 47(1)(a) of the Federal Act, or
  • any other rollover of property under the Federal Act, other than a disposition that is or is part of an eligible event. (Dispositions of shares are also not “excluded dispositions” if proceeds of disposition are reduced due to the application of paragraph (j) of the definition of “proceeds of disposition” in section 54 of the Federal Act.)

5(2) to (10)

Recapture for Original Transferor of SDGs associated with Ordinary Rollovers

Subsections 5(2) and (3) of the Proposed Amendments provide for recapture in connection with SDGs associated with clause (a) of the definition of “eligible event” in subsection 0.1(1). These are pre-March 22, 2007 rollovers under subsections 85(1) and (2), section 85.1 and subsection 97(2) of the Federal Act in respect of which an election has been made under section 57.9 of the CTA.

This recapture applies in connection with pre-March 22, 2007 dispositions (other than “excluded dispositions”, as described above) of all or part of the shares or the partnership interest received as consideration in connection with such a rollover, where the shares or partnership interest disposed of were continuously held by the corporation since such rollover. It is noted that subsections 5(6) and (7) of the Proposed Amendments provides for further circumstances in which the same SDG may be recaptured, in particular where there has been a disposition of the property that was originally transferred on a rollover basis.

The SDG recapture under subsections 5(2) and (3) of the Proposed Amendments, which is an amount added in computing the corporation's adjusted net income in the year in which the subsequent disposition occurs, is generally equal to the SDG associated with the original rollover. However, where the subsequent disposition is of shares, deemed dividends arising on the redemption of those shares reduce the amount of recapture to the extent those dividends are deductible in computing the corporation's taxable income under subsection 112(1) or (2) or 138(6) of the Federal Act. In addition, the recaptured amount is pro-rated where only part of the relevant shares or partnership interest has been disposed of on the subsequent disposition.

In the event that the subsequent disposition is itself part of an eligible event described in clause (a) or (b) of the definition of “eligible event”, the amount of the SDG recapture will typically be offset by an addition under clause 4(2)“A” (b) or the value of “A” in subsection 4(4) of the Proposed Amendments to the amount of the SDG associated with the subsequent eligible event.

As previously noted, an “excluded disposition” includes a disposition that is part of an amalgamation or winding-up to which section 87 or subsection 88(1) of the Federal Act applies. In these cases, SDG recapture is deferred as a consequence of subsection 5(10) of the Proposed Amendments. Under that subsection, the new corporation or parent corporation is deemed to be a continuation of its predecessor corporation. If there is a further relevant pre-March 22, 2007 disposition, the deferred amount will be then recognized.

Recapture of SDGs associated with Replacement Property Rules

Subsections 5(4) and (5) of the Proposed Amendments provide for recapture of SDGs associated with the operation of the replacement property rules.

This recapture applies in connection with pre-March 22, 2007 dispositions (other than “excluded dispositions”) of all or part of the replacement property acquired by the corporation, assuming it was continuously held since the eligible event or since the first time it was acquired after the eligible event, as the case may be.

The recapture, which is an amount added in computing the corporation's adjusted net income in the year in which the subsequent disposition occurs is generally equal to the SDG associated with the disposition of the former business property. The recaptured amount is pro-rated where only part of the replacement property is disposed of on the subsequent disposition.

In the event that the subsequent disposition is itself part of an eligible event described in clause (a), (b) or (c) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments, the amount of the recapture will typically be offset by an addition under clause 4(2) “A” (b) or the value of “A” in subsection 4(4) to the amount of the SDG associated with the subsequent eligible event.

The application of subsection 5(10) of the Proposed Amendments results in the deferral of the recapture under subsections 5(4) and (5) in the case of an eligible amalgamation or eligible winding-up since this event is an “excluded disposition” which does not trigger recapture. If there is a further relevant pre-March 22, 2007 disposition, the deferred amount will be then recognized.

Recapture for Original Transferee of SDGs Associated with Rollovers

Subsections 5(6) and (7) of the Proposed Amendments provide for recapture, in certain cases, in connection with gains deferred for OCMT purposes by reason of clause (a) or (b) of the definition of “eligible event” in subsection 0.1(1). These are pre-March 22, 2007 rollovers under subsections 85(1) and (2), section 85.1 and subsections 97(2) and 142.7(3) of the Federal Act in respect of which CTA elections have also been made.

The recapture under subsections 5(6) and (7) of the Proposed Amendments applies where there is a subsequent pre-March 22, 2007 disposition (other than an “excluded disposition”) by the recipient corporation of property that has been rolled over in these circumstances. This recapture only applies if the relevant property was continuously held by the recipient corporation since the original rollover and the recipient and the transferor do not deal with each other at arm's length immediately before or immediately after the eligible event.

The amount recaptured under subsections 5(6) and (7) of the Proposed Amendments in respect of a subsequent disposition is equal to the SDG in respect of the original rollover, to the extent associated with the relevant property that is being disposed of. However, where the subsequent disposition is of shares, deemed dividends arising on the redemption of those shares reduce the amount of recapture to the extent those dividends are deductible in computing the corporation's taxable income under subsection 112(1) or (2) or 138(6) of the Federal Act.

In the event that the subsequent disposition is itself part of an eligible event described in clause (a), (b) or (c) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments, the amount of the recapture will typically be offset by an addition under clause 4(2) “A” (b) or the value of “A” in subsection 4(4) to the amount of the SDG associated with the subsequent eligible event.

The application of subsection 5(10) of the Proposed Amendments results in the deferral of recapture under subsections 5(6) and (7) in the case of an eligible amalgamation or eligible winding-up since this event is an “excluded disposition”. If there is a further relevant pre-March 22, 2007 disposition, the deferred amount will be then recognized.

Recapture of SDGs Associated with Amalgamations and Windings-up

Subsections 5(8) and (9) of the Proposed Amendments provide for recapture, in certain cases, in connection with gains deferred for OCMT purposes by reason of clause (d) or (e) of the definition of “eligible event” in subsection 0.1(1). These are pre-March 22, 2007 amalgamations or windings-up to which section 87 or subsection 88(1) of the Federal Act applies.

The recapture under subsections 5(8) and (9) of the Proposed Amendments applies where there is a subsequent pre-March 22, 2007 disposition (other than an “excluded disposition”) by the amalgamated corporation or parent corporation (referred to below as a “successor”) of property that was received on the amalgamation or winding-up. This recapture only applies if the relevant property was continuously held by the successor since the original reorganization.

The amount recaptured under subsections 5(8) and (9) of the Proposed Amendments in respect of a subsequent disposition is equal to the SDG in respect of the original reorganization, to the extent associated with the relevant property that is being disposed of. However, where the subsequent disposition is of shares, deemed dividends arising on the redemption of those shares reduce the amount of recapture to the extent those dividends are deductible in computing the corporation's taxable income under subsection 112(1) or (2) or 138(6) of the Federal Act. The portion of the SDG associated with a particular property is determined by reference to the amount by which the carrying value of the particular property was increased as a result of the corporate reorganization.

In the event that the subsequent disposition is itself part of an eligible event described in clause (a), (b) or (c) of the definition of “eligible event” in subsection 0.1(1) of the Proposed Amendments, the amount of the recapture will typically be offset by an addition under clause 4(2) “A” (b) or the value of “A” in subsection 4(4) to the amount of the SDG associated with the subsequent eligible event.

The application of subsection 5(10) of the Proposed Amendments results in the deferral of the recapture under subsections 5(8) and (9) in the case where the subsequent disposition is part of an eligible amalgamation or eligible winding-event, since this subsequent event is an “excluded disposition” which does not trigger immediate recapture. If there is a further relevant pre-March 22, 2007 disposition, the deferred amount will be then recognized.

6

Section 6 of the Proposed Amendments is designed to address the double counting of losses that occurs in the event that OCMT losses are carried forward to a successor corporation on an amalgamation or winding-up pursuant to subsection 57.5(8) or (9) of the CTA. There is double counting to the extent that “investment losses” which reflect the carryforwards also can reduce net income for OCMT purposes.

Section 6 of the Proposed Amendments deals only with pre-March 22, 2007 transactions. As announced in the 2007 Ontario Budget, legislative changes to the CTA are contemplated to address the double counting of losses with regard to post-March 21, 2007 transactions.40

Subsection 6(1) of the Proposed Amendments defines a “designated corporation”. A “designated corporation” in respect of another corporation is a predecessor corporation in connection with an amalgamation to which section 87 of the Federal Act applies or a winding-up to which subsection 88(1) of the Federal Act applies. The definition also contemplates that a chain of such amalgamations and windings-up can be looked through for this purpose. The definition is used in determining the calculations under section 6 of the Proposed Amendments.

Subsection 6(2) of the Proposed Amendments applies where there has been an amalgamation before March 22, 2007 of two or more corporations in circumstances to which section 87 of the Federal Act applies. In computing the new corporation's adjusted net income for its first taxation year, there must be added the lesser of:

  • the total “investment losses” (as described below) of a “designated corporation” (i.e., a predecessor corporation) from an investment in another designated corporation that is controlled by the first designated corporation, and
  • the total unused OCMT losses carried forward from the other designated corporation to the new corporation, determined without reference to restrictions arising on the acquisition of control.

Example 2

There is a vertical amalgamation of Corporations A (the parent), B (first subsidiary) and C (second subsidiary) to form Corporation ABC. Corporation A has previously written off investment losses with regard to investments in Corporation B (i.e., shares and debt issued by Corporation B to Corporation A) and with regard to investments in Corporation C (i.e., shares and debt issued by Corporation C to Corporation A).

Analysis

1. Under subsection 6(2), an amount is added to Corporation ABC's adjusted net income.

2. Each of Corporations A, B and C is a designated corporation in respect of Corporation ABC.

3. The first calculation under subsection 6(2) would be with regard to Corporation A's investment in Corporation B. The second calculation under subsection 6(2) would be with regard to Corporation A's investment in Corporation C.

4. With regard to the first calculation, the “investment loss” in respect of shares and debt issued by Corporation B would be determined under clause 6(2)(a) and the balance of Corporation B's CMT losses would be examined under clause 6(2)(b).

5. With regard to the second calculation, the “investment loss” in respect of shares and debt issued by Corporation C would be determined under clause 6(2)(a) and the balance of Corporation C's CMT losses would be examined under clause 6(2)(b).

6(3)
“investment loss”

A corporation's “investment loss” is relevant in the calculation of the amount added in computing the corporation's adjusted net income under subsections 6(2) and (4) of the Proposed Amendments.

The “investment loss” of a corporation for a taxation year from one or more of its investments in shares or debts issued by another corporation is the amount, if any, by which the sum of,

  • the investor's net loss for the year for OCMT purposes, and
  • the amount that would be the investor's net income for the year for OCMT purposes if the investor's net income were not affected by any reduction thereof attributable to a reduction in the fair value of those investments,

exceeds the sum of

  • the investor's net income for the year for OCMT purposes, and
  • the amount that would be the investor's net loss for the year for OCMT purposes if the investor's net loss for the year were not affected by any increase thereof attributable to the reduction in the fair value of those investments.

Example 3

A corporation subject to OCMT claims a $1,000 loss for accounting purposes from its investment in its subsidiary. Subsequently, but before 2007, the corporation and its subsidiary amalgamate. The $1,000 loss is claimed for the corporation's last taxation year, which immediately precedes the amalgamation. The corporation's net income for that last taxation year for the purposes of the OCMT is $200.

Analysis:

1. For the purposes of clause 6(3)“A”(a) of the Proposed Amendments, the corporation's net loss for the last taxation year is nil.

2. For the purposes of clause 6(3)“A”(b) of the Proposed Amendments, the amount that would be the corporation's net income for that year if the $1,000 loss were ignored is $1,200 ($200 + $1,000).

3. For the purposes of clause 6(3) “B” (a) of the Proposed Amendments, the corporation's net loss if the $1,000 loss were ignored is nil.

4. For the purposes of clause 6(3) “B” (b) of the Proposed Amendments, the corporation's net income for that year is $200.

5. Consequently, the corporation's “investment loss” for that year is equal to $1,000 (i.e., $1,200 - $200).

6. As discussed, the $1,000 investment loss is factored into the calculation in subsection 6(2) of the Proposed Amendments.

Subsection 6(4) of the Proposed Amendments applies where there is a winding-up of a parent corporation's subsidiary completed before March 22, 2007 in circumstances to which subsection 88(1) of the Federal Act applies. In computing the parent corporation's adjusted net income, there is added the lesser of:

  • the total investment losses of the parent (or “designated corporations” in respect of the parent) from their investments in the subsidiary, and
  • the total unused OCMT losses carried forward from the subsidiary to the parent corporation, determined without reference to restrictions arising on the acquisition of control.

In the event that shares or debt issued by a subsidiary corporation become shares or debt issued by a new corporation as a result of an eligible amalgamation of the subsidiary corporation, for the purposes of determining an investment loss from the shares or debt issued to the new corporation (in the event that the new corporation amalgamates with a corporation that control the new corporation), the new corporation is deemed by subsection 6(5) of the Proposed Amendments to be the same corporation as, and a continuation of, the particular corporation.

Subsection 6(6) of the Proposed Amendments ensures that provisions of the CTA referred to in section 6 in connection with eligible amalgamations and the completion of eligible windings-up are to those provisions as they read immediately after the time of the event.


1 Subsection 57.2(1) of the Corporations Tax Act (the “CTA”).

2 Subsection 57.3(1) of the CTA.

3 Subsection 57.4(1) of the CTA.

4 A corporation's Ontario allocation factor is no more than one and reflects the extent to which a corporation carries on business in Ontario. If all of a corporation's permanent establishments are in Ontario, its Ontario allocation factor would be equal to one. The reduction of a corporation's OCMT liability to reflect the corporation's Ontario allocation factor is achieved through the operation of the value of “A” in subsection 57.3(1) of the CTA.

5 The extension of the credit carryforward period from 10 to 20 taxation years was announced as part of the 2007 Ontario Budget.

6 The extension of the loss carryforward period from 10 to 20 taxation years was announced as part of the 2007 Ontario Budget. Eligible losses for carryforward purposes are determined under section 57.5 of the CTA.

7 Subsection 57.1(2) of the CTA.

8 Subsection 57.4(1) of the CTA.

9 In Bill 44, introduced on March 25, 2008, similar adjustments are proposed in the CTA and the Taxation Act, 2007 to the $5 million asset size test.

10 See paragraph 1 of subsection 1(5) of Ontario Regulation 509/07.

11 Paragraph 1 of subsection 1(4) of Ontario Regulation 509/07.

12 Paragraphs 2 and 3 of subsection 1(4) of Ontario Regulation 509/07.

13 Paragraphs 2 and 3 of subsection 1(5) of Ontario Regulation 509/07.

14 The Proposed Amendments clarify the deadline for filing the election, as the 180-day period specified in Ontario Regulation 509/07 ends on Saturday, February 23, 2008. The deadline of Monday, February 25, 2008 made explicit in the Proposed Amendments is consistent with subsection 79(2) of the Legislation Act.

15 Subsection 1(3) of Ontario Regulation 509/07.

16 However, the Proposed Amendments do not implement the portion of Bulletin 96-1R that would establish an undepreciated deferred gain balance in respect of depreciable property received by a transferee. Subject to an election applicable to taxation years ending before a future date specified, the Bulletin contemplated that a minimum yearly amount from the balance would be added in computing the transferee's adjusted net income.

17 Section 0.2 of the Proposed Amendments refers to such accounting gains as “reorganization gains”.

18 Subsection 2(1) of the Proposed Amendments.

19 Clauses 2(1)(a) to (c) of the Proposed Amendments.

20 “Carrying value” is defined in section 3 of the Proposed Amendments.

21 Subsection 4(2) of the Proposed Amendments.

22 Subsections 4(4) and (5) of the Proposed Amendments.

23 For taxation years ending before October 18, 2000, the reference to “two times” should be read as “1.5 times”.

24 Subsections 4(4) to (6) of the Proposed Amendments.

25 Subsections 4(4) to (6) of the Proposed Amendments.

26 Subsection 4(7) of the Proposed Amendments.

27 This exemption is provided through clause (b) of the definition of “excluded disposition” in subsection 5(1) of the Proposed Amendments. See also subsection 5(10) of the Proposed Amendments.

28 Subsection 5(2) of the Proposed Amendments.

29 Subsection 5(3) of the Proposed Amendments.

30 Subsection 5(4) of the Proposed Amendments.

31 Subsection 5(3) of the Proposed Amendments.

32 Subsection 5(6) of the Proposed Amendments.

33 Subsection 5(7) of the Proposed Amendments.

34 Subsection 5(8) of the Proposed Amendments.

35 Subsection 5(9) of the Proposed Amendments.

36 Section 6 of the Proposed Amendments.

37 The required OCMT legislative changes have not yet been introduced.

38 See clause (b) of the definition of “excluded disposition” in subsection 5(1) of the Proposed Amendments.

39 See clause (c) of the definition of “excluded disposition” in subsection 5(1) of the Proposed Amendments.

40 The legislative changes are proposed in Bill 44, which was introduced on March 25, 2008. See proposed amendments to section 57.5 of the CTA and section 58 of the Taxation Act, 2007.

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