Excerpt from Special Notice Vol. 5 No. 17
Vol. 5 No. 17 / December 2003
Bill 41 - Alberta Corporate Tax Amendment Act, 2003 Clarification of Royalty Tax Deduction Rules
Bill 41 - Alberta Corporate Tax Amendment Act, 2003, received Royal Assent on December 4, 2003. While there has been no change in policy with respect to the Royalty Tax Deduction ('RTD'), Bill 41 includes a rewrite of the rules for calculating the RTD.
The RTD reflects the Alberta government's policy that royalties are a business expense and should be fully deductible in the calculation of taxable income for Alberta purposes. Thus, to the extent that a company's crown royalties exceed its resource allowance, the excess, referred to as attributed Canadian royalty income ('ACRI') in the former legislation, may be claimed as a deduction in the taxation year. If taxable income is insufficient to fully offset the excess, the balance, referred to as attributed royalty income carry forward in the former legislation, may be carried forward to be deducted in a subsequent year.
Carry forward amounts may be transferred, or successored, from one owner to another on the acquisition of all or substantially all of the Canadian resource properties by purchase, amalgamation, merger, winding up or otherwise from another person. However, carry forward amounts may only be successored twice. Once an amount has been successored, the ability to claim RTD in a year in respect of the successored amount is limited to the income from the properties that gave rise to the successored amount. A change in control of the corporation also triggers the successor rules.
As stated previously, these RTD policies have not changed. However, by defining the pools separately, the new legislation clarifies that unsuccessored and successor pool amounts must be tracked separately. The new provisions will come into force for taxation years beginning on or after December 4, 2003, the day Bill 41 came into force.
The terms attributed Canadian royalty income and attributed royalty income carry forward do not flow through to the revised legislation. Effective for the first taxation year beginning on or after December 4, 2003, companies must separate their attributed royalty income carried forward from the immediately preceding year into unsuccessored, first successor and second successor pools. After that time, separate calculations of royalty tax deduction claim amounts and pool amounts available to be carried forward are required for each pool.
As with the former legislation, the additions to the unsuccessored pool are the same as the previous ACRI. As also with the former legislation, maximum claim amounts for first and second successor pools are restricted to the amount of the resource income from the properties acquired with the respective pools. The company's RTD for the year is the total of its royalty tax deduction claim amounts from all three types of pools. In total, the RTD for the year cannot exceed the corporation's taxable income for the year.
As was previously the case, separate first or second successor pools must be set up each time a company undergoes a change in control or acquires all or substantially all of the Canadian resource properties of another company. Just as before, successor pools do not have to be established in all cases, for example, when certain amalgamation or winding-up of subsidiaries occur.