2016-0656351I7 Corporate Minimum Tax Eligible Loss Calculation

Principal Issues: Whether the CMT eligible loss calculation takes into account adjusted net losses arising in previous taxation years in which the corporation had no permanent establishment in Ontario?

Position: Yes, providing the adjusted net losses arise in a taxation year that ended in any of the previous 10 taxation years, if the previous taxation year ended before March 23, 2007. Adjusted net losses that arise in a taxation year ending after March 22, 2007 may be used, to the extent permitted, in the calculation of the CMT eligible loss in the subsequent 20 taxation years. A corporation’s CMT eligible loss for a particular taxation year is the sum of the corporation’s adjusted net losses less any CMT eligible losses that were deducted or deemed to have been deducted for the previous taxation years.

Reasons: CMT eligible losses are not adjusted to reflect changes in a corporation's Ontario allocation and are calculated as if the corporation was subject to CMT in every year.

Author: Hooey, Kathy
Section: 56(1), 57(1), 58(1), 58(2) and 58(3) of the Taxation Act, 2007

                                                                                                                                          November 15, 2016

Bruce Hartt                                                                                                                        Lita Krantz
Technical Applications Officer                                                                                           Manager
Medium Business Audit Division                                                                                       Deferred Income Plans, Section 44
Domestic Compliance Programs Branch                                                                          Income Tax Rulings Directorate
Small and Medium Enterprises Directorate                                                                      Legislative Policy Regulatory
                                                                                                                                          Affairs Branch

                                                                                                                                          2016-065635

Corporate Minimum Tax - Eligible Loss Calculation

We are writing in response to your request for clarification regarding the computation of eligible losses for Ontario Corporate Minimum Tax (“CMT”) purposes under subsection 58(1) of the Taxation Act, 2007 (the “TA” ).  In particular, you question whether a corporation’s CMT payable for a taxation year takes into account adjusted net losses arising in a previous taxation year in which the corporation did not have a permanent establishment in Ontario for purposes of determining a subsequent taxation year’s eligible losses.

The formula provided under subsection 56(1) of the TA calculates the amount of CMT payable by a corporation for a taxation year by multiplying the CMT tax rate and the corporation’s Ontario allocation factor for the year with the amount, if any, by which a corporation's adjusted net income (ANI) for the year exceeds the corporation’s eligible losses for the year. Where a corporation has nil ANI or an adjusted net loss no CMT is payable for the year.

Pursuant to subsection 58(1) of the TA eligible losses are determined at a point in time.  A corporation’s eligible losses for a taxation year are essentially the sum of the corporation’s adjusted net losses for the ten previous taxation years, if the taxation year ended before March 23, 2007, less amounts deducted or deemed deducted as an eligible loss for those previous ten taxation years.  Adjusted net losses that arise for taxation years ending after March 22, 2007 may be used, to the extent permitted, in the calculation of eligible losses for the subsequent twenty taxation years. The amount of the eligible losses deducted or deemed deducted for a taxation year is limited to the adjusted net income, if any, for that taxation year.

In a taxation year in which a corporation has ANI, subsection 58(2) of the TA deems eligible losses to be applied to the fullest extent possible to reduce the corporation’s ANI in a taxation year to nil, regardless of whether or not the corporation was subject to CMT. Therefore, in a taxation year where a corporation does not have a permanent establishment in Ontario the corporation will be deemed to have deducted eligible losses to the extent the corporation otherwise would have had ANI in that taxation year. In addition, if at any time control of a corporation is acquired by a person or group of persons, additional restrictions under subsection 58(3) of the TA will apply in determining the amount of the corporation`s eligible losses for a taxation year ending after that time.

In conclusion, a corporation that becomes subject to CMT will be required to determine its eligible losses for a particular taxation year as if it had been subject to CMT in previous taxation years.  There is no provision in the TA to adjust eligible losses to reflect changes in a corporation’s Ontario allocation factor.

We trust our comments will be of assistance.

Yours truly,

Lita Krantz CPA, CA
for Director,
Deferred Income Plans, Section II
Financial Industries and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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