31 August 1995 Internal T.I. 9518367 - MIN TAX & LABOUR SPONSORED FUND TAX CREDIT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

is the labour sponsored funds tax credit lost when a taxpayer is subject to minimum tax

Position TAKEN:

to the extent that the credit reduces regular tax below the amount of minimum tax, yes

Reasons FOR POSITION TAKEN:

To the extent that min tax is higher than regular tax, the benefit from credit is lost, esp since the min tax carry forward in 120.2 does not include the amount of any labour sponsored fund tax credit lost

		August 31, 1995

	WINDSOR TAX SERVICES	Headquarters
	Sharon Fells	A. Humenuk
	Client Assistance			957-8953

		951836

Minimum Tax and the Labour Sponsored Funds Tax Credit

We are replying to your letter of July 14, 1995 concerning the application of the labour sponsored funds tax credit where an individual is subject to minimum tax.

In our telephone conversation of August 22, 1995 (Fells\Humenuk), you advised that the taxpayer in question is subject to minimum tax in 1992 in large part because of a rollover of a retiring allowance into an RRSP. In 1992, the taxpayer also purchased "approved shares" as defined in subsection 127.4(1) of the Act, thereby entitling him to a labour sponsored tax credit of $1,000 deductible in computing regular tax payable for 1992. The labour sponsored tax credit was denied on the initial assessing of his 1992 return and the taxpayer is seeking an adjustment or an explanation for the denial of his claim.

Minimum tax essentially involves a recalculation of an individual's income on the basis that certain tax deductions, exemptions and tax credits which would otherwise be available for regular tax purposes are not deductible or applicable. The only tax credits to be taken into account in calculating the amount of minimum tax are those set out in section 127.531 in determining the individual's basic "minimum tax credit" and the foreign tax credit as determined under subsection 127.54(2) of the Act. The minimum tax credit is comprised of the non-refundable tax credits listed in "Step 5" on the income tax return for individuals and does not include the labour sponsored funds tax credit. Thus the labour sponsored funds tax credit is not used in the calculation of tax payable under the minimum tax rules.

If the amount of tax payable as calculated under Division E.1 (the minimum tax calculation) is greater than the amount of tax payable under Division E (regular tax payable), the individual's tax payable under Part I for the year is determined under Division E.1 rather than Division E of the Act. This means that the labour sponsored funds tax credit determined under subsection 127.4(2) of the Act will only reduce an individual's tax payable for a particular year to the extent that regular tax payable before the application of the credit exceeds the amount of tax payable under the minimum tax rules. If the shares which gave rise to the tax credit were purchased in the first 60 days of the end of a year, the individual may be entitled to claim the tax credit in the year amounts were paid for the share or the preceding year to the extent permitted under section 127.4 of the Act. In our telephone conversation of August 22, 1995, you indicated that this is not the case with this particular taxpayer.

Where an individual is subject to minimum tax in a particular year, the amount of any additional tax paid as determined by subsection 120.2(3) of the Act, can be deducted from regular tax payable in any of the next 7 taxation years within the limits set out in subsection 120.2(1) of the Act. The amount of additional tax available to be applied to other years is calculated without reference to the tax credits described in sections 126, 127 and 127.2 through 127.4 of the Act. As a result, even though the benefit from a labour sponsored funds tax credit was lost due to the application of minimum tax, the minimum tax carry forward will not include any amount on account of that credit.

This is consistent with the intent of the minimum tax legislation as explained in the Department of Finance publication entitled "A Minimum Tax for Canada" released in May 1985. On page 24 and 25 of that document, the rationale for not permitting the deduction of various tax credits in computing minimum tax payable is explained. With tax credits such as the overseas tax credit, political contribution tax credit and others, there is no provision to apply the unused portion of such credits to any other year and they are not refundable. Accordingly, to the extent that such credits reduce regular tax payable below the amount of minimum tax payable and provide no benefit to the individual, they are lost. With tax credits which permit a carry over to another taxation year, an individual may apply the credit to that other year to the extent permitted by the rules governing that tax credit. It is our understanding that the labour sponsored funds tax credit was not mentioned in this document because the legislation governing the tax credit had not yet been passed at the time the document was published.

You indicate that TOM 40(11)6.4 is confusing in that it suggests to you that the tax credits so listed can reduce minimum tax payable. We have been informally advised by Assessment of Returns Directorate that the instructions in TOM 40(11)6.4 are intended to ensure that a taxpayer does not lose the benefit of any carry over of tax credits otherwise available in respect of the credits listed therein where the tax savings of those credits are lost in a particular year because the individual is subject to minimum tax. However, in the situation you are dealing with, the taxpayer's labour sponsored fund tax credit cannot be carried forward or back because the approved shares were purchased in 1992 and not within the first 60 days of the year; however, since the minimum tax payable of $16,600 exceeded both "tax on taxable income" and basic federal tax of $13,293, the instructions in TOM 40(11)6.4 and related figures do not apply to this particular situation.

P.D. Fuoco
Section Chief
Personal and General Section
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

c.c. Alan Bradshaw
Assessment of Returns Directorate