2017-0709241E5 Subsections 125(3.2) & 125(5.1)

Principal Issues: Whether the business limit that can be assigned under subsection 125(3.2) is before or after the application of subsection 125(5.1).

Position: After.

Reasons: See below.

Author: Robinson, Katie
Section: 125

XXXXXXXXXX                                                                                                            2017-070924

January 25, 2018

Dear XXXXXXXXXX:

Re: Interaction of subsections 125(3.2) and (5.1) of the Income Tax Act

This is in reply to your correspondence dated June 12, 2017, wherein you requested our views on the interaction of subsections 125(3.2) and (5.1) of the Income Tax Act (“Act”).  More specifically, you asked whether the assignment of the business limit under subsection 125(3.2) occurs before or after the business limit reduction in subsection 125(5.1).

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.”

Generally speaking, under subsection 125(5.1) of the Act, and notwithstanding subsections (2), (3), (4) and (5), the business limit of a “Canadian-controlled private corporation” (“CCPC”), as that term is defined in subsection 125(7) of the Act, for a particular taxation year is reduced on a straight-line basis if the total of the taxable capital of the CCPC (employed in Canada) and, if applicable, of other corporations with which the corporation is associated, exceeds $10 million.  Once the taxable capital of the CCPC and any associated corporations reaches $15 million its business limit would be zero.

Under subsection 125(3.2) of the Act, a CCPC (the “first corporation”) may be able to assign a portion of its business limit under subsection (2), (3), or (4) to another CCPC (the “second corporation”) if certain conditions are met.  Subsection 125(3.1) provides that the first corporation’s business limit for the year must be reduced by any portion of its business limit for the year that it assigns to the second corporation under subsection 125(3.2).

In our view, the use of the word “notwithstanding” in subsection 125(5.1) ensures that any assignment of a CCPC’s business limit under subsection 125(3.2) can only occur after its business limit under subsection (2), (3), or (4) is first reduced by subsection 125(5.1).

Please note that more information on the small business deduction and the business limit can be found in Chapter 4 of the T4012 T2 Corporation - Income Tax Guide 2016 on the CRA website (https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4012-t2-corporation-income-tax-guide-2016/t2-corporation-income-tax-guide-chapter-4-page-4-t2-return.html).

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

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