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.
Deloitte LLP, Quebec City