How to Best Leverage Small Business Investment Corporations: Section 150.1(2.1) of the Income Tax Act

The General Rule Under Section 150.1(2.1) of the Income Tax Act and What is a ‘prescribed corporation’?

Section 150.1(2.1) of the Income Tax Act (the “Tax Act”) mandates prescribed corporations file electronic tax returns. A “prescribed corporation” is defined under s.205.1(2) of the Income Tax Regulations (the “Regulations”).

Prior to the passing of the Budget Implementation Act, 2023, a prescribed corporation was defined as any corporation whose gross revenue exceeded $1 million. In s.98(2) of the Budget Implementation Act, 2023, s.205.1(2) of the Regulations was changed to define a prescribed corporation as “any corporation”. This change became effective on June 22, 2023, when the Budget Implementation Act, 2023 received royal assent. As such, s.150.1(2.1) applies to all corporations and to tax years beginning after 2023.

If a corporation does not file its tax return electronically, then it will be subject to a $1,000 penalty under s.162(7.2).

Exceptions to the General Rule – Exemptions for Certain Types of Corporations

Section 205.1(2) of the Regulations clearly outlines distinct types of corporations that will be exempt from s.150.1(2). These corporations are:

• insurance corporations as defined in subsection 248(1) of the Tax Act;
• non-resident corporations;
• corporations reporting in functional currency as defined in subsection 261(1) of the Tax Act; or
• corporations that are exempt under s.149 of the Tax Act from tax payable.

Section 248(1) defines an insurance corporation as a corporation that carries on an insurance business. A non-resident corporation is a corporation that has its central management and control in another country. Functional currency is the currency of another country that is both the primary currency in which the corporation keeps its records and books for financial reporting purposes for the tax year and a qualifying currency, such as US dollars.

A corporation resident in Canada can elect to report in a functional currency. Section 149 of the Tax Act provides exemptions for tax payable on taxable income for certain persons. The following is a summary of the types of entities that will be exempt:

• municipal authority,
• certain trusts, such as a pension trust or an amateur athlete trust,
• a crown corporation,
• a registered charity,
• a housing corporation or a housing company,
• a registered Canadian amateur athletic association,
• a registered journalism organization,
• an association of universities and colleges of Canada,
• a non-profit corporation or organization,
• a small business investment corporation,
• a labour organization, and
• a mutual insurance corporation.

If a corporation qualifies under any one of these exemptions in s.149, that corporation will not be a prescribed corporation for the purposes of s.150.1(2.1) and will not be required to file its tax return electronically.

The Requirements Under Section 5101 of the Regulations for a Small Business Investment Corporation

 A small business investment corporation is defined in s.5101 of the Regulations. The definition sets out specific requirements that the corporation must meet in terms of its incorporation date, its investments and its share ownership. Below is a list of the requirements that the corporation must meet to be considered a small business investment corporation.

1. The corporation must be incorporated after May 22, 1985;
2. The shares, and the right to acquire shares of the corporation, were owned by one or more registered pension plans, one or more trusts where all the beneficiaries are registered pension plans, one or more segregated fund trusts where all the beneficiaries are registered pension plans or one or more persons prescribed by s. 4802 of the Regulations;
3. The corporation’s only undertaking must have been investing its funds, and its investments must have consisted solely of small business securities, interests of a limited partner in small business investment limited partnerships, interests in small business investment trusts, shares of the capital stock of a corporation or a put, call, warrant or other right to acquire or sell those shares, specified properties, or any combination;
4. The corporation must at all times hold properties referred to in b) of this list;
5. It cannot have borrowed money except from its shareholders;
6. It cannot have accepted deposits; and
7. It cannot have held, and cannot have been part of a group of persons who did not deal with each other at arm’s length that held, more than 30% of the outstanding voting shares of any class of voting stock of a corporation.

If a corporation meets the requirements to be defined as a small business investment corporation, it will be exempt from Part I tax on its taxable income as well as the requirement to file an electronic return.

Tax Pro Tip – Keep Track of Filing Requirements

It may not always be the case that the CRA will bring changes to filing requirements directly to your attention. It is prudent to keep up to date with the CRA’s website, and tax law websites or blogs to make sure that you are not missing any changes or deadlines.

If you have failed to meet your filing requirements, you may receive a notice of assessment that outlines penalties that you owe. Engage with an expert Canadian tax lawyer to help you understand your filing requirements and how to best manage your corporate affairs.

FAQ

How will I know if I own a non-resident corporation?

Under paragraph 250(4)(a) of the Tax Act, a corporation will be a corporation resident in Canada if it was incorporated after April 26, 1965. However, there will be situations where a corporation incorporated after April 26, 1965, will be considered to be a non-resident.

If the central management and control of the corporation is exercised in a different country, the corporation may be deemed to be a non-resident corporation. Generally, the location of the directors of the corporation will be the location of the corporation’s residence. Thus, if the directors of the corporation are in the United States, then the corporation may be considered to be a non-resident.

I have received a notice of assessment, but my corporation falls under one of the exempt categories of corporations. What can I do now?

Once you receive a notice of assessment, you will have to object to the assessment in order to challenge it. A notice of objection to a notice of assessment is a formal process where you may challenge the validity or correctness of an assessment issued by the Canada Revenue Agency (CRA).

The objection must be filed within a prescribed time frame, typically 90 days from the date the notice of assessment is sent and must be submitted in the prescribed form and manner. It is recommended that you speak with a top Canadian tax lawyer to discuss the merit of your objection and how you can proceed.

 

Disclaimer: This article provides broad information. It is only accurate as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on as tax advice. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.