2017-0706401E5 Specified corporate income, streaming of expenses

Principal Issues: Whether streaming expenses can be used to circumvent the SCI rules.

Position: Likely not.

Reasons: See below.

Author: Couvrette, Amanda
Section: 125

XXXXXXXXXX                                                                                                     2017-070640
                                                                                                                             A. Couvrette
February 7, 2018

Dear XXXXXXXXXX:

Re: Allocating expenses to specific activities of a corporation

This is in reply to your correspondence dated May 31, 2017, wherein you requested our views on allocating expenses to specific activities of a corporation in a situation where the corporation has only one business.  Within this business, the corporation earns income eligible for the “small business deduction” (SBD) and income ineligible for the SBD due to the “specified corporate income” (SCI) provisions in the Income Tax Act (“Act”).  More specifically, you are asking whether expenses can be allocated to the activities generating income ineligible for SBD due to the SCI provisions in order to maximize the income eligible for the SBD.

Your correspondence also included several other scenarios involving allocating expenses to specific activities of a corporation.  For the purpose of this reply, we will focus on the SCI example since the other scenarios are based on legislation that is longstanding and has not changed.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of a particular transaction proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, “Advance Income Tax Rulings and Technical Interpretations.”

Section 125 of the Act provides the rules for the calculation of the SBD available to a Canadian-controlled private corporation (“CCPC”) on its income from carrying on an active business in Canada.  Using the SBD, a CCPC may reduce its tax otherwise payable on such income by an amount equal to the SBD rate multiplied by the least of three amounts described in subsection 125(1).

As noted, subsection 125(1) sets out the lesser of three amounts that determines the amount of a CCPC’s SBD claim for a taxation year.  In general terms, the first amount (the amount described in paragraph 125(1)(a)) is equal to the sum of the portion of the CCPC’s income from an active business carried on in Canada for a taxation year excluding certain income and exceeding certain losses.  Subparagraph 125(1)(a)(i), clauses (A) to (C) indicate the portions, if any, of a CCPC’s income from an active business that are not eligible for the SBD.

In particular, clause 125(1)(a)(i)(B) refers to the portion of a CCPC’s income that is described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year.  Applying a textual, contextual, and purposive approach, it is our view that the word “income” in this section refers to “net income”.

Accordingly, if expenses are disproportionately allocated when calculating the income described in subparagraph (a)(i) of the definition of SCI in subsection 125(7) for the year, we may need to consider if the allocation of the expenses is reasonable.  Only the expenses that are reasonable to consider to be attributable to the activities generating the income described in subparagraph (a)(i) of the definition of SCI should be considered.  Such a determination could only be made on a case-by-case basis having regard to all the pertinent facts and circumstances.

We trust that these comments will be of assistance.

Yours truly,

Katie Robinson, CPA, CA
Acting Manager
Business Income and Capital Transaction Section
Business and Employment Division
Income Tax Rulings Directorate

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018