2019-0795751E5 129(6) - multiple tax years

Principal Issues: Where two corporations are associated for only the first 3 months of ACo's tax year, whether, for the purpose of section 125, all the income for ACo's entire year will be deemed to be active income by subsection 129(6).

Position: Only income for the period during which the corporations are associated will be deemed to be active income.

Reasons: The legislation.

Author: Ross, Matthew
Section: 129(6)

XXXXXXXXXX                                                                                                                                          2019-079575
                                                                                                                                                                   Matthew Ross, CPA, CA
June 6, 2019

Dear XXXXXXXXXX:

Re:  subsection 129(6) and multiple taxation years

This is in reply to your email of February 11, 2019, in which you requested our views on how subsection 129(6) of the Income Tax Act (the “Act”) would apply in the following situation.

In the situation you presented, Company A has a taxation year ending December 31, 2018.  Company B has one taxation year commencing January 1, 2018, and ending on March 27, 2018, pursuant to subsection 249(4) of the Act due to an acquisition of control. Company B has a second taxation year that commences March 28, 2018, and ends on December 31, 2018.  You have indicated that Company A and B were associated, within the meaning of subsection 256(1) of the Act, for Company B’s first taxation year ending in 2018, but that they ceased to be associated on March 28, 2018.

Throughout 2018, Company A rents a property to Company B.  For the purposes of our response below, we have made the assumption that Company B uses the property in its active business carried on primarily in Canada and the rental expense is deductible by Company B in computing income from that business.  You have asked whether subsection 129(6) of the Act would apply to deem the rental income received by Company A to be “active business income” for its entire 2018 taxation year, or only the portion received during the January 1, 2018 to March 27, 2018 period.

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 particular transactions 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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Subsection 129(6) of the Act provides, among other things, that in computing the recipient corporation’s income from property from a source in Canada for the purposes of subsection 129(4) of the Act, such income will not include any portion of an amount that was or may be deductible (“deductible portion”) in computing income for any taxation year from an active business carried on in Canada by an associated corporation (“the payer”).  Additionally, subsection 129(6) provides that, for the purposes of section 125 and subsection 129(6) of the Act, the deductible portion will be deemed to be income from an active business of the recipient.

In other words, subsection 129(6) of the Act deems the property income of a corporation to be income from an active business where it was received from an associated corporation and resulted in a deduction in computing the associated corporation’s income from an active business.

Our view is that the taxation year referenced in regards to the deductible portion is that of the payer, rather than the recipient.  In order to meet the requirements of subsection 129(6) of the Act during any particular taxation year of the payer, the payer must be an associated corporation in relation to the recipient in that taxation year.

Accordingly, in the situation you have described, it is our view that subsection 129(6) of the Act will apply to deem the rental income received by Company A to be active business income for only that portion of the income received for the period January 1, 2018, to March 27, 2018.

We trust our comments will be of assistance.

Yours truly,

Pamela Burnley
Manager
Business Income and Capital Transactions
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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