Is a Future Income Tax Asset an Asset Used in an Active Business?

In 2013, the CRA modified its position on the qualification of a future income tax asset as an asset used in an active business for the purposes of the definitions of “qualified small business corporation” (QSBC) in subsection 110.6(1) and “small business corporation” (SBC) in subsection 248(1). (See TI 2014-0537611C6, October 11, 2013.) The CRA now considers that a future income tax asset is not an asset for the purposes of the QSBC and SBC definitions. Therefore, a future income tax asset must not be taken into account when one is determining whether a share is a QSBC share or whether a company is an SBC.

A future income tax asset is identified as an asset on a company’s balance sheet in accordance with the recommendations in section 3465 of the CPA Canada Handbook on income tax accounting. It is recognized for the tax effects that would arise if the firm’s assets were realized for their carrying amounts.

The CRA’s longstanding position was that a future income tax asset was an asset for the purposes of the QSBC and SBC definitions, but that it was not “used” in an active business, and that the future income tax asset should be considered an ineligible asset when one was determining whether a share was a QSBC share or whether a company was an SBC.

The CRA’s original position was set out in TI 2000-0015825 (October 2, 2000) and was based on Munich Reinsurance Company (Canada Branch) v. The Queen (2000 CanLII 308 (TCC)), in which the TCC found that the right to the income tax refund did not constitute property used to carry on an insurance business in Canada. However, this finding was overturned on appeal (2001 FCA 365): the FCA held that the right to a refund of tax overpayments was a right acquired in the course of carrying on a business and that consequently the right was property held in the course of carrying on the business.

Nevertheless, in 2008 the CRA reiterated its original position (CRA document no. 2008-028530). The CRA believed that the FCA decision could not be used to determine whether a future income tax asset is an asset used principally in an active business in accordance with section 110.6. First, Munich involved an income tax refund, not a future income tax asset; second, the analysis focused mainly on the holding of property and not on its use. The CRA instead based its 2008 position on Ensite Ltd. v. R (1986 CanLII 41 (SCC)), which established that the asset must be “employed” or “risked” in the business in order to be considered an asset used in a business.

In its new 2013 position, the CRA now considers that a future income tax asset is not an asset for the purposes of the QSBC and SBC definitions. The CRA states that when a future income tax asset becomes an income tax receivable, this receivable must be considered as an asset to establish whether a share is a QSBC share or whether a company is an SBC, and it may be considered to be used in an active business if the income tax receivable results from the active carrying on of a business. The CRA provides the example of an income tax receivable resulting from a loss carryback from an active business.

The CRA’s change in position is favourable for taxpayers. A corporation that qualifies as an SBC may take advantage of certain tax benefits—in particular, the capital gains exemption; the use of a trust or other structure to split income with a spouse or children without triggering the attribution rule under subsection 74.4(2); or even the qualification of a loss that would otherwise be a capital loss as a business investment loss. For the purpose of determining a company’s status, however, it is important to limit its ineligible assets. Henceforth, future income tax assets in a corporation’s financial statements will not have to be purified because they will no longer be considered ineligible assets.

Mylène Tremblay
Deloitte LLP, Quebec City
mytremblay@deloitte.ca

Canadian Tax Focus
Volume 4, Number 4, November 2014
©2014, Canadian Tax Foundation