2014-0544771I7 Ontario Transitional Tax Debit/Credit

Principal Issues: Whether non-capital losses incurred by a subsidiary corporation prior to the acquisition by parent corporation and the wind-up of the subsidiary corporation into parent corporation are included in the total Ontario balance of parent corporation for the purposes of the Ontario transitional tax debit/credit calculation.

Position: No

Reasons: Variable "Z" of the definition of "total Ontario balance" specifically excludes the pre-acquisition of control losses of the subsidiary corporation.

Author: White, Julie
Section: TA 48(6); 88(1.1)(e)

                                                                    June 1, 2015

XXXXXXXXXX                                             Income Tax Rulings Directorate
Large Case File Auditor                               Financial Industries and Trusts Division
XXXXXXXXXX TSO                                    Julie White
                                                                    905 721 5202

                                                                    2014-054477

      Ontario Transitional Tax Debit/Credit Calculation

This is in response to your email in which you asked for our comments on whether a non-capital loss incurred by a subsidiary Corporation before it was acquired by and wound up into the parent corporation is included in the determination of the parent corporation’s Ontario transitional tax debit/credit liability.  Your query relates to the amount of variable “Z” of the total Ontario balance in subsection 48(6) of the Taxation Act, 2007 (Ontario).

You have provided the following facts:

1.    Corporation Y is a taxable Canadian corporation which operates nationally in every provincial jurisdiction in Canada. Corporation Y XXXXXXXXXX has a December 31st year-end. Corporation Y has an Ontario provincial allocation rate of approximately XXXXXXXXXX% every year.

2.    Corporation X was a XXXXXXXXXX. It was subject to taxation under the Income Tax Act (Canada) (Federal Act). Corporation X had incurred large non-capital losses over the years as XXXXXXXXXX. Corporation X also had a December 31st year end.  Corporation X did not have a PE in Ontario, and therefore was not subject to tax in Ontario, at any time.

3.    In XXXXXXXXXX, Corporation Y acquired all of the shares of Corporation X from XXXXXXXXXX, and as a result Corporation X became a wholly-owned subsidiary of Corporation Y, at that time. When Corporation X was acquired, it had accumulated non-capital losses of approximately $XXXXXXXXXX. At the end of XXXXXXXXXX, as part of the winding-up of Corporation X into Corporation Y, Corporation Y added this amount to its own non-capital loss pool on its Schedule 4 (Federal) and Schedule 4 (Ontario).

4.    In XXXXXXXXXX, Corporation Y’s taxable income before the application of non-capital losses for both Federal and Ontario purposes was approximately $XXXXXXXXXX. Corporation Y fully utilized the non-capital loss to reduce its federal taxable income, leaving a balance of NIL to be carried forward to future years. For Ontario income tax purposes, Corporation Y did not deduct any of the non-capital loss. Therefore, on the Ontario Schedule 4, the non-capital loss of $XXXXXXXXXX was carried forward in its entirety.

5.    Corporation Y was taxable for both Federal and Ontario purposes in the XXXXXXXXXX taxation years however Corporation Y did not deduct any of the non-capital loss to reduce its Ontario taxable income in any of those years. At the end of 2008, the balance of the Ontario Schedule 4 was $XXXXXXXXXX and the balance of the Federal Schedule 4 was NIL.

6.    For Ontario transitional tax purposes, if the non-capital loss is included in variable “Z” of the total Ontario balance, it will reduce Corporation Y’s transitional tax debit or increase the transitional tax credit.

Our comments

Variable “Z” of the total Ontario balance provides for the inclusion of non-capital losses that would be deductible under paragraph 111(1)(a) of the Federal Act as it applies for the purposes of the Corporations Tax Act (Ontario) in computing the corporation’s taxable income for the first taxation year ending after December 31, 2008.  However, paragraph (c) of variable “Z” requires that subsection 88(1.1) of the Federal Act be read without reference to the exception provided under paragraph (e) of that subsection.

Subsection 88(1.1) allows a parent corporation under certain circumstances to use the non-capital losses of a subsidiary corporation that has been wound up.  However, paragraph 88(1.1)(e) limits the use that can be made of the former subsidiary's non-capital losses where, either the parent or the subsidiary has undergone an acquisition of control.  More specifically, paragraph (e) provides that where there has been an acquisition of control of the subsidiary at any time whatever, no amount of the subsidiary’s non-capital loss incurred before the acquisition of control is deductible in computing the taxable income of the parent corporation for a particular taxation year ending after the acquisition of control.  An exception to this treatment is also provided in  paragraph (e) through the phrases “except that such portion of the subsidiary's non-capital loss or farm loss as may reasonably be regarded as its loss from carrying on a business... is deductible only”, along with additional conditions contained in subparagraphs (i) and (ii). 

Subparagraph (i) requires that the subsidiary’s loss business is carried on throughout a particular year for profit or with a reasonable expectation of profit.  Subparagraph (ii) limits the portion of the loss which may be applied in subsequent taxation years to the income from the particular business which gave rise to the loss, or a business where the activities are substantially the same as the subsidiary’s loss business. 

It is the exception provided in the wording of paragraph (e) that is ignored for purposes of determining the non-capital loss amount for variable “Z” in calculating the total Ontario balance. In other words, variable ”Z” does not include a non-capital loss incurred by a subsidiary prior to the acquisition of control of the subsidiary, regardless of whether the conditions in subparagraphs 88(1.1)(e)(i) and (ii) are met.  When Corporation Y acquired Corporation X there was an acquisition of control; therefore, any non-capital loss incurred by Corporation X before it was acquired by Corporation Y is excluded from the amount determined in variable “Z” of the total Ontario balance. As a result, Corporation X’s non-capital loss incurred prior to January 1, 2009 will not decrease a transitional tax debit or increase a transitional tax credit. 

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library.  A severed copy will also be distributed to the commercial tax publishers, following a 90 day waiting period (unless advised otherwise to extend this waiting period), for inclusion in their databases.  The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer.  Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.  Requests for this latter version should be e-mailed to:  ITRACCESSG@cra-arc.gc.ca. In such cases, a copy will be sent to you for delivery to the taxpayer.

Steve Fron CPA, CA
Manager
Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Canada Revenue Agency

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