Guide to Calculating Paid-up Capital 2013

About this content

This content is a simplified reformulation of Revenu Québec’s official publication:
co-1136.g(2013-12).pdf,
produced to help citizens and entrepreneurs better understand their tax obligations.
It does not constitute legal or tax advice. Refer to the official document for any
decision.

Who this document is for

This guide is intended for corporations that must determine their paid-up capital in Quebec, except insurance corporations and financial institutions, which use other specialized forms. It is intended in particular for:

• corporations that must complete the form Paid-up Capital Calculation (CO-1136);
• corporations that must complete the form Paid-up capital to be used in calculating the tax
  of certain corporations (CO-1136.CS);
• corporations that want to determine their eligibility for certain tax measures, such as the
  small business deduction;
• corporations associated with other corporations;
• corporations having an interest in a partnership or a joint venture;
• corporations with investments, loans, advances, debts, provisions or special deductions to be considered in the calculation of paid-up capital;
• corporations eligible for certain special deductions, such as those relating to agricultural corporations, fishing businesses, major investment projects, international financial centres or manufacturing corporations. In this guide, unless otherwise indicated, the expression partnership covers both partnerships and joint ventures.

Context and objective

The document explains how to calculate a corporation’s paid-up capital according to the rules set out in Quebec’s Taxation Act, mainly in sections 1130, 1136, 1137, 1137.0.0.2, 1137.0.1, 1137.1, 1137.3, 1138, 1138.1, 1138.2.2, 1138.2.5, 1138.2.6 and 1138.4. Paid-up capital was used in particular to calculate the capital tax for taxation years that began before January 1, 2011. Even though the rate of this tax is 0% for taxation years beginning after December 31, 2010, the calculation remains mandatory in several situations, because it is also used to establish eligibility for certain tax assistance measures and to calculate certain tax amounts. The guide also aims to help complete forms CO-1136 and CO-1136.CS correctly, line by line, by specifying the items to include, the deductions allowed, the applicable reductions, the special rules and the documents to attach. The information in the guide is not an official legal interpretation of Quebec or Canadian laws. The document also uses the masculine form as a generic term.

Complete and detailed information

1. Forms covered by the guide

Form CO-1136 — Paid-up Capital Calculation

Form CO-1136 is used to calculate a corporation’s paid-up capital for a given taxation year. It is used in particular:

• to determine the capital tax payable for a taxation year that begins before
  January 1, 2011;
• to establish, for the following taxation year, the corporation’s eligibility for certain tax assistance measures;
• to calculate the amount of tax assistance to which the corporation may be entitled;
• to satisfy any other use provided for under the Taxation Act. Even when the taxation year begins after December 31, 2010 and the capital tax rate is 0%, form CO-1136 must still be completed, because paid-up capital continues to be used for other tax purposes.

Form CO-1136.CS — Paid-up capital to be used in calculating the tax of certain

corporations Form CO-1136.CS is used to calculate the paid-up capital for the taxation year that
precedes the year concerned.

This paid-up capital is used, for the year concerned:

• to determine eligibility for certain tax measures;
• to calculate certain tax assistance amounts;
• for any other purpose provided for under the Taxation Act. Form CO-1136.CS must be completed in the following cases:
• during the taxation year preceding the year concerned, the corporation carried on a business exclusively outside Quebec;
• the year concerned is the corporation’s first taxation year. When a corporation is associated with one or more other corporations in the year concerned, the paid-up capital to be used for each associated corporation is the amount calculated on a worldwide basis for the last taxation year ended before the beginning of the year concerned.

Forms excluded from the guide

The guide does not deal with the following three forms:

Form	Corporations concerned
CO-1140 — Paid-up Capital Calculation for a Financial Institution	Financial institutions, including banks, savings and credit unions, loan corporations, trust corporations and securities dealers
**CO-1167 — Insurance corporation Calculation of premiums payable, taxable premiums and −
capital tax relating to marine insurance**	Insurance corporations
CO-1140.A — Paid-up capital to be used for purposes other than calculating capital tax	Financial institutions and insurance corporations

2. Structure of the official guide

The official guide is divided as follows:

• part 1 presents general information and the abbreviations used;
• part 2 explains forms CO-1136 and CO-1136.CS line by line;
• part 3 deals with corporations that hold an interest in a partnership or joint venture;
• part 4 explains how to send the documents;
• part 5 describes the cases where paid-up capital is used for something other than calculating capital tax;
• part 6 contains the calculation schedules.

When an explanation applies to both forms CO-1136 and CO-1136.CS, the guide mentions only form CO-1136. References placed at the end of certain passages refer to the relevant sections of the Taxation Act.

Abbreviations used

Abbreviation	Meaning
IFC	International financial centre
HSF	Health Services Fund
PAAF	Proportion of activities attributable to manufacturing and processing activities
GAAP	Generally accepted accounting principles

3. Shareholders’ equity and debts

Line 300 — Paid-up share capital and interest of the same nature

Enter the total:

• of paid-up share capital;
• of any participation interest that is of the same nature as share capital. Paid-up share capital corresponds to all shares issued by a corporation for which it has actually received consideration. Reference: 1136 para. 1, subpara. a).

Line 301 — Surplus

Enter the surplus shown in the corporation’s financial statements. Reference: 1136 para. 1, subpara. b). The surplus mainly includes:

• retained earnings;
• amounts attributable to the revaluation of a property above its cost.

Corporation that carries on part of its activities in a recognized business

When a corporation carries on part of its activities in a recognized business and those activities result in the surplus shown in the financial statements being lower than it would otherwise have been, adjustments are provided for. These adjustments make it possible to include in paid-up capital the surplus related to activities carried on elsewhere than in the recognized business. This situation is dealt with at line 325. A recognized business may be:

• a business located in the Montréal International Trade Zone at Mirabel;
• a securities exchange business recognized by the Autorité des marchés financiers;
• a securities clearing house recognized by the Autorité des marchés financiers;
• a business carried on as part of a major investment project. Reference: 1130.

Line 302 — Other surplus

Enter the total of other surplus amounts shown in the financial statements. These surpluses may include, for example:

• amounts paid by shareholders in excess of the amount allocated to share capital, such as share premium;
• government assistance shown as surplus.

Lines 305 to 312 — Provisions and reserves

Enter the total of the corporation’s provisions and reserves, except for certain exclusions. The following provisions must not be included:

• provisions for amortization or depletion;
• provisions allowed by Part I of the Taxation Act, to the extent that they were deducted from the corporation’s income under that Part;
• provisions for losses relating to a rental or leasing contract, where the corporation carries on rental or leasing activities and cannot deduct those losses in computing its income under Part I of the Act. Reference: 1136 para. 1, subpara. b). The main provisions not allowed under Part I of the Act, and therefore to be included in paid-up capital, are:

Line	Provision to include
305	Inventory provisions
306	Investment provisions
307	Contingency provisions
308	Undeducted doubtful accounts provisions
312	Warranty provisions
312	Discount provisions
312	Volume rebate provisions
312	Estimated vacation or salary provisions
A provision corresponds to an amount recognized as a counterpart to an expense in accounting profit. It relates to an estimated charge.
A reserve corresponds instead to an appropriation of amounts from retained earnings or other surplus.
Interpretation bulletins mentioned:
Bulletin	Subject
---	---
IMP. 1136-9/R5	Provisions and reserves
IMP. 1136-17/R3	Impairment

Line 315 — Financing of new vehicle inventory

Enter the amount related to the financing of new automobile inventory purchased by the corporation for resale. This amount constitutes a debt or loan that would otherwise be included in paid-up capital. Bulletin mentioned: IMP. 1136-15/R4.

Line 317 — Debts secured by property of the corporation

Enter the corporation’s debts whose payment is secured by property of the corporation. Do not include accounts payable of less than six months, even if their payment is secured by property of the corporation. Reference: 1136 para. 1, subpara. c). When a debt is secured only in part by property of the corporation, the full amount of that debt must still be included in paid-up capital. Bulletin mentioned: IMP. 1136-6/R4.

Line 318 — Bank loans and overdrafts

Enter the total:

• of bank loans;
• of bank overdrafts. Reference: 1136 para. 1, subparas. c) and d). If the overdraft shown on the bank statement is higher than the one shown in the financial statements, for example because deposits in transit exceed outstanding cheques, use the overdraft shown in the financial statements. When a corporation has several bank accounts, some overdrawn and others not, the consolidated balance of all current bank accounts may be used only if all of the following conditions are met:
• the accounts are held at the same bank;
• the bank calculates interest receivable or payable on the consolidated balance of all accounts;
• the corporation and the bank intended to set off the balances.

Line 319 — Other loans and advances granted to the corporation

Enter loans and advances granted to the corporation, directly or indirectly, regardless of their source. Reference: 1136 para. 1, subpara. d). Bulletin mentioned: IMP. 1136-1/R8.

Line 320 — Accrued interest

Enter:

• the corporation’s accrued interest, whether payable or not, that has existed for more than six months;
• accrued interest whose payment is secured by property of the corporation. Reference: 1136 para. 1, subparas. c) and e).

Line 323 — Bank acceptances and similar instruments

Enter the total:

• of the corporation’s bank acceptances;
• of other similar instruments accepted by a bank or a person;
• to the extent that these items constitute liabilities of the corporation. Reference: 1136 para. 1, subpara. f).

Netting shown in the financial statements

When financial statements prepared under GAAP show a net balance corresponding to the difference between the carrying amount of financial assets and that of financial liabilities, only that net balance must be included in paid-up capital. Bulletins mentioned:

Bulletin	Subject
IMP. 1136-4/R4	Various inclusions in paid-up capital
IMP. 1136-18	Financial instruments

Line 324 — Other debts existing for more than six months

Enter the corporation’s other debts that have existed for more than six months. A debt begins to exist as of the invoicing date and as soon as a person becomes liable to pay a sum to another person. Reference: 1136 para. 1, subpara. e). Examples of debts of more than six months to include:

• accounts payable;
• salaries payable;
• bonuses payable;
• dividends payable;
• deposits received to guarantee the return of leased property;
• vacation pay payable;
• deposits received to secure a contingent claim;
• unsecured balance owing on the purchase of a business. A debt repaid before the end of the taxation year is still considered to exist at the end of the year if the repayment is part of a series of loans and
  repayments intended to improperly reduce paid-up capital. Reference: 1136 para. 2.

Line 325 — Other amounts to include

Corporation having an interest in a partnership

When a corporation holds an interest in a partnership, it must include its share of the amounts that would be included in the partnership’s paid-up capital if the partnership were a corporation. Reference: 1136 para. 3. The detailed rules are set out in the part devoted to partnerships.

Unrealized foreign exchange gains at year-end

Include deferred credits arising from unrealized foreign exchange gains, also called unrealized gains, at year-end, when these amounts appear in assets. Reference: 1136 para. 1, subpara. b.3). Conversely, deferred charges arising from unrealized foreign exchange losses may be deducted from paid-up capital at line 348.

Amount relating to a recognized business

If the corporation carries on non-eligible activities in a recognized business within the meaning of section 1130 of the Taxation Act, and those activities result in a deficit or reduce the surplus, an amount must be added to paid-up capital to reflect that deficit or reduction. The calculation must be made using the financial information kept separately for eligible activities. Enter at line 325 the lesser of the following two amounts:

• the deficit that would exist if only eligible activities were taken into account;
• the excess of the surplus that would exist if eligible activities were excluded over the surplus already included in paid-up capital for the year under subparagraph b of paragraph 1 of section 1136. Reference: 1136 para. 1, subpara. b.2).

The eligible activities of a recognized business correspond to the activities related to the operations carried out in the operation of that recognized business. Bulletins mentioned for amounts to be included in paid-up capital:

Bulletin	Subject
IMP. 1136-2/R3	Leasing and rental contracts
IMP. 1136-3/R4	Trust account
IMP. 1136-4/R4	Various inclusions in paid-up capital
IMP. 1136-7/R3	Nominee corporation or agent
IMP. 1136-10/R2	Life insurance policy loan
IMP. 1136-16/R2	Government assistance in the form of a grant or loan
IMP. 1136-18	Financial instruments

4. Deductions in the calculation of paid-up capital

Line 331 — Costs related to the issuance of shares or bonds

A corporation may deduct the costs incurred to issue shares or bonds, including discount, if those costs have not already reduced:

• the surplus;
• the paid-up share capital. Reference: 1137 para. b). These costs may include, in particular:
• amounts paid to obtain articles issued by government authorities;
• legal fees. In this context, a bond is a marketable debt security issued by a share corporation or another legal entity in favour of several lenders in order to finance a long-term need. The costs of issuing shares or bonds reduce the assets used to calculate the reduction for investments, loans and advances at line 371.

Line 332 — Deficit

The corporation may deduct the amount of its deficit in calculating paid-up capital. Reference: 1137 para. a).

Line 333 — Mining operations deduction

A corporation may deduct an amount equal to 33 1/3% of the portion of its paid-up capital determined under sections 1136 to 1138 of the Taxation Act, calculated as if this mining deduction did not exist. Reference: 1137 para. b.5).

Calculation of the eligible portion of paid-up capital

The total paid-up capital, determined under sections 1136 and 1138 without taking this deduction into account, must be multiplied by a fraction. The numerator of the fraction is the greater of the following two amounts:

1. the gross income for the year from a mineral resource that the corporation owns or operates;
2. the capital cost of the property acquired during the year as part of a major mine expansion, where that expansion results in one of the consequences provided for in subparagraphs 1 and 2 of subparagraph ii of paragraph a of the first paragraph of category 28 of Schedule B to the Taxation Regulations, and where the cost is added to the capital cost of property in category 41 of that schedule. The denominator is the corporation’s gross income for the year, increased, if applicable, by the excess of the amount in point 2 over that in point 1. Gross income from a mineral resource also includes gross income from processing minerals, metals or minerals coming from that resource, up to a stage not exceeding that of primary metal or its equivalent. Reference: 1137.0.1 para. a).

Corporation that is a member of a partnership

When a corporation is a member of a partnership, the gross income from a mineral resource earned by the partnership is deemed to be that of the corporation according to the proportion provided for in the Taxation Act. Reference: 1137.0.1 para. b).

Line 336 — Ship acquisition or conversion costs

When a corporation builds, converts, has built or has converted an eligible ship, it may deduct the eligible acquisition or conversion costs related to that ship. An eligible ship is a ship:

• with a gross tonnage of at least 50 tons;
• that the corporation builds or converts for itself, or has built or converted on its behalf;
• for which the Ministry of Finance and Economy has issued a certificate confirming that the ship is built or converted in Quebec;
• and, if the ship is built for the corporation, the corporation is its first purchaser. A certificate issued before September 20, 2012 came instead from the Minister of Finance. A copy of the certificate must be attached to the corporation’s income tax return. Eligible costs are those related to a business carried on in Quebec by the corporation. References: 1137 paras. b.2) and b.2.1).

Deduction period

The deduction applies to each taxation year included in the deduction period. This period:

• begins on the start date of the taxation year in which construction or conversion work begins;
• ends at the close of the fourth taxation year following the year in which the corporation completes the work or takes delivery of the ship.

Eligible costs depending on the situation

Taxation year	Corporation that builds the ship itself	Corporation that has the ship built	Corporation that converts the ship itself	Corporation that has the ship converted
Years during the work, except the year when the work is completed or delivery is taken	Portion of the capital cost incurred between the start of construction and the end of the year	Portion of the construction cost provided for in the contract and paid to the builder between the start of the work and the end of the year	Portion of the capital cost incurred between the start of conversion and the end of the year	Portion of the consideration provided for in the contract and paid to the converter between the start of the work and the end of the year
Year in which the corporation completes the work or takes delivery	Cost of the ship according to the financial statements	Cost of the ship according to the financial statements	Total eligible costs incurred and included in the ship’s capital cost	Portion of the total consideration paid to the converter for the work
Four taxation years following the year in which construction or conversion is completed	Cost of the ship according to the financial statements	Cost of the ship according to the financial statements	Total eligible costs incurred and included in the ship’s capital cost	Portion of the total consideration paid to the converter for the work

Line 339 — Government or non-government assistance

The ship acquisition or conversion costs must be reduced by any government or non-government assistance that the corporation:

• received;
• is entitled to receive;
• can reasonably expect to receive when it files its income tax return for the year. References: 1137 paras. b.2) and b.2.1).

Line 342 — Deduction related to financing new vehicle inventory

The corporation may deduct an amount equal to 50% of the lesser of the following two amounts:

• the value, according to the financial statements, of the stock of new automobile equipment purchased for resale;
• the value of that stock entered at line 315 of form CO-1136. Reference: 1137 para. b.0.1).

Lines 345 to 347 — $1 million deduction

A corporation may deduct up to $1 million in calculating its paid-up capital. References: 1137 para. b.1.2) and 1137.0.0.2. To claim this deduction:

1. complete form $1 Million Deduction (CO-1137.A);
2. report amount B calculated in that form to line 345 of form CO-1136.

Non-associated corporation

If the corporation is not associated with any other corporation:

• enter 100% at line 346;
• report the amount from line 345 to line 347.

Associated corporation

If the corporation is associated with one or more other corporations and claims this deduction at the end of its taxation year ending in the calendar year in which the taxation year of each associated corporation also ends:

1. complete form Agreement respecting the $1 million deduction (CO-1137.E);
2. report to line 346 of form CO-1136 the percentage allocated to the corporation at line 16, column F, of form CO-1137.E;
3. enter at line 347 the result obtained by multiplying line 345 by the percentage at line 346. Reference: 1137.0.0.2.

Restrictions

• A tax-exempt corporation cannot claim this deduction.
• For the first taxation year of a corporation, this deduction must not be taken into account in calculating the paid-up capital at the beginning of the year using form CO-1136.CS.

Line 348 — Other deductions

Unrealized foreign exchange losses

The corporation may deduct deferred charges arising from unrealized foreign exchange losses, that is, non-realized losses, at year-end. Reference: 1137 para. b.1.1). Deferred credits arising from unrealized foreign exchange gains at year-end, when they appear in assets, must in turn be included in paid-up capital.

Corporation carrying on activities in a recognized business

When a corporation is an eligible corporation within the meaning of section 1130 of the Taxation Act, it may deduct at line 348:

• any amount included in the total at line 330, except the amount referred to at line 325 in respect of the amount relating to a recognized business;
• the excess, if any, of the deficit calculated without the eligible activities over the deficit already deducted at line 332, to the extent that that amount is not otherwise deducted and is attributable to the eligible activities of a recognized business carried on by the corporation. References: 1137 paras. d) and e).

Repayment of assistance

If the corporation repays, for the year concerned, government or non-government assistance that had been taken into account at line 339 for that year or a prior year, the repaid amount must be entered at line 348. References: 1137.1 and 1137.3.

5. Reduction for investments, loans and advances

When a corporation claims a reduction for investments, loans and advances, it must attach a list of investments to form CO-1136 and to the Corporation Income Tax Return (CO-17). This schedule must:

• be prepared on a separate sheet;
• be titled List of investments;
• show, in the upper-right corner, number CO-17S.8. For each eligible investment, indicate:
• the description of the investment;
• the number of shares and their class, if applicable;
• the amount of the investment. The total of this list must correspond to the total of eligible property entered at line 360 of form CO-1136.

6. Property eligible for the reduction

Line 351 — Shares of other corporations

The corporation may deduct the value of its investments in shares of other corporations. Reference: 1138 para. 1, subpara. a). When the value of a share recorded as an asset of the corporation is lower than its original cost, the value of the share is deemed to be its original cost. Reference: 1138 para. 1.1. In that case, you must:

• use the original cost of the share for line 351;
• include at line 306, as a disallowed provision, the difference between the original cost and the value recorded as an asset;
• adjust total assets by entering at line 372 the amount of the disallowed provision. If a share investment is shown on the liabilities side because it has a deficit balance, its value is considered nil for the purposes of the reduction for investments.

120-day holding rule

Share investments are generally not subject to the 120-day holding rule, unless they are:

• shares of a bank;
• shares of a corporation related to a bank;
• shares of a corporation related to a savings and credit union. The corporation therefore generally does not have to hold these shares for a continuous period of at least 120 days including the end of its taxation year. A corporation is not considered related to a financial institution if it is not related to it during a period of at least 120 days including the end of the taxation year and during which it holds the shares. References: 1138 paras. 2.1.2 and 2.1.4.

Permanent shares of a savings and credit union

Investments in the permanent shares of a savings and credit union, as well as any participation interest of the same nature, are eligible if the 120-day holding rule is respected. Reference: 1138 para. 1, subpara. a.1). Membership shares in cooperative associations, agricultural cooperatives or other cooperatives are not considered shares for the purposes of paid-up capital.

Other details

• A stock option cannot reduce paid-up capital.
• A mutual fund trust unit is not an eligible investment.
• An investment in shares of a mutual fund corporation may be eligible, because the security is a share of a corporation.
• It is therefore necessary to verify whether the fund is constituted as a corporation or as a trust.

Line 352 — Bonds of other corporations or partnerships

The corporation may deduct the value of its investments in bonds:

• of other corporations;
• of partnerships. References: 1138 para. 1, subparas. a) and c). A bond is a marketable debt security issued by a share corporation or another legal entity in favour of several lenders to finance a long-term need.

Restrictions

Even if they are bond-like, securities issued by a government or debts owing to a government are not eligible for the reduction of paid-up capital. In this context, the term government does not include:

• a municipal authority;
• a school authority. When a bond is detachable and its interest coupons and remainder are traded separately, the remainder, that is, the capital portion, constitutes an eligible investment.

120-day holding rule

To be eligible, a bond investment must be held for a continuous period of at least 120 days including the end of the corporation’s taxation year. This rule also applies to bonds issued by a partnership. A bond issued by a financial institution related to the corporation is eligible.

A bond issued by an unrelated financial institution is eligible only if:

• it is included in the financial institution’s long-term liabilities;
• it is issued for a period of at least five years. References: 1138 paras. 2.1.2 and 2.1.1.1. A corporation is not considered related to a financial institution if it is not related to it during a period of at least 120 days including the end of its taxation year and during which it holds the bond. Reference: 1138 para. 2.1.4.

Line 353a — Debts owing by other corporations secured by property, except customer accounts

receivable of less than six months The corporation may deduct debts arising from:

• the sale of property to another corporation;
• the supply of services to another corporation; when those debts are secured, in whole or in part, by property of that other corporation. Reference: 1138 para. 1, subpara. d.1). The corporation may also deduct any amount receivable from another corporation when its payment is secured, wholly or partly, by property of that other corporation. If, at the end of the taxation year, these debts have not been amounts receivable for more than six months, they must be held for a continuous period of at least 120 days including the end of the taxation year. A debt, whether secured or not, is not eligible if:
• it has not been held for a continuous period of at least 120 days including the end of the taxation year;
• it has been owing for six months or less and arises from an accounts receivable or a tax receivable in consideration for the sale of property or the provision of a service;
• it is a debt of a government, except that the term government does not include a municipal authority or a school authority;
• it is owed by the parent corporation whose head office is located outside Canada. References: 1138 paras. 2.1.2, 2.1.2.1 and 2.1.3.

Line 353b — Debts owing by other corporations existing for more than six months

The corporation may deduct any amount receivable from another corporation when that amount has existed for more than six months at the end of the taxation year. Reference: 1138 para. 1, subpara. d.2). Examples:

• accounts receivable;
• retainers receivable;
• subscriptions receivable;
• sale-leaseback contracts recorded as assets under GAAP;
• dividends receivable. Accounts receivable used to reduce paid-up capital must be reduced by the doubtful accounts provisions deducted in computing taxable income. Reference: 1138 para. 2.1.2.2.

Line 354 — Other loans and advances to other corporations

The corporation may deduct loans and advances made to other corporations, subject to restrictions. References: 1138 para. 1, subpara. b) and para. 2. Amounts paid to subcontractors before:

• performance of a contract;
• provision of services;
• delivery of property; may be considered eligible advances. The following are not considered loans or advances to other corporations:
• amounts receivable by a subsidiary from a parent corporation whose head office is outside Canada;
• deferral deposits relating to consigned goods.

Examples of eligible loans and advances

Notes receivable

Notes receivable, secured or not, that represent a cash loan to a corporation may reduce paid-up capital.

Commercial paper

Commercial paper is defined according to the Canadian money market. It is generally a promissory note representing a loan whose maturity is usually less than one year.

Security deposit fund

A sum provided by merchants as a security deposit fund to their incorporated association is considered an eligible loan or advance.

Prepaid expenses

Advances made to other corporations and recorded as prepaid expenses may be eligible. These advances include, in particular:

• insurance premiums;
• municipal taxes;
• school taxes;
• property rental fees;
• machinery rental fees;
• equipment rental fees. The following are not eligible:
• amounts paid to the Commission de la santé et de la sécurité du travail;
• professional dues.

Series of loans or advances — anti-avoidance rule

No reduction is allowed when a loan, advance, debt, bank acceptance or similar instrument is intended to improperly reduce paid-up capital. Reference: 1138 para. 2.2.

120-day holding rule

The 120-day holding rule generally does not apply to loans and advances. However, it does apply:

• to commercial paper;
• to loans and advances to a corporation related to a bank;
• to loans and advances to a corporation related to a savings and credit union. In this context, a corporation is not considered related to a bank or a savings and credit union if it is not related to it during a continuous period of at least 120 days beginning on the date of the loan or advance and including the end of its taxation year. Reference: 1138 para. 2.1.2.

Line 355 — Loans and advances to a partnership or joint venture

The corporation may deduct loans and advances made to a partnership or joint venture if they entitle it to the reduction for investments, loans and advances and if the amount is included in the paid-up capital of a corporation that holds an interest in that partnership or joint venture. Reference: 1138 para. 1, subpara. c). Loans and advances are not considered as such when the debtor and the holder of a substituted debt have an arm’s length relationship at the time of substitution. If the loans or advances referred to in this line are commercial paper, they are subject to the 120-day holding rule. Reference: 1138 para. 2.1.0.1.

Line 357 — Bank acceptances and similar instruments

The corporation may deduct bank acceptances and other similar instruments:

• issued for its benefit;
• accepted by a bank or a person;
• constituting assets of that bank or person. Reference: 1138 para. 1, subpara. d). A bank acceptance is a credit transaction in which a bank lends its signature in favour of a client for a specified amount, by accepting a bill of exchange drawn on it by that client. Bank acceptances and similar instruments whose drawer is a corporation authorized to receive deposits are not eligible, unless the drawer is:
• a loan corporation;
• a trust corporation;
• a securities dealer;
• and that corporation is related to the corporation claiming the reduction. Reference: 1138 para. 2.1.1. The 120-day holding rule applies to bank acceptances and similar instruments. Reference: 1138 para. 2.1.2.

Line 358 — Investments with an unrelated financial institution

The corporation may deduct the following amounts when they are included in the paid-up capital of a financial institution with which it is not related:

• shares;
• other long-term liabilities issued for a period of at least five years. Reference: 1138 para. 2.1.1.1. The 120-day holding rule applies:
• to shares of a bank;
• to shares of a corporation related to a bank;
• to shares of a corporation related to a savings and credit union;
• to loans and advances to a corporation related to these financial institutions.

Line 359 — Other eligible property

Corporation having an interest in a partnership

When a corporation holds an interest in a partnership, it is possible to include in its eligible property the amounts that would be included in the partnership’s eligible property.

Non-resident corporation carrying on an international transportation business

If the corporation does not reside in Canada during the taxation year and carries on an international passenger or freight transportation business through a permanent establishment in Canada, it may enter at line 359:

• the value of ships used for international transport;
• the value of aircraft used for international transport;
• the value of movable property held or used for the same purpose during the year. References: 1138 para. 1, subpara. e) and 1138.4. Bulletins mentioned on the reduction of paid-up capital: | Bulletin | Subject | |---|---| | IMP. 1138-1/R5 | Eligible investments | | IMP. 1138-2/R4 | Concept of corporation | | IMP. 1138-3/R4 | Interests in a partnership or joint venture | | IMP. 1138-4/R2 | Commercial paper | | IMP. 1138-5/R3 | Credit balance with a securities broker and advances to other corporations | | IMP. 1138-6/R2 | Concept of loan and related concepts | | IMP. 1138-8/R1 | Holding an investment |

7. Total assets for the reduction for investments, loans and advances

Line 371 — Total assets according to the balance sheet

To calculate the reduction for investments, loans and advances, the corporation’s assets correspond to those shown in its financial statements. However, if the following amounts have not already reduced those assets, they must be deducted to determine line 371:

• provisions and reserves for amortization or depletion;
• future tax asset or tax debit carryforward deducted in calculating paid-up capital;
• share or bond issue costs deducted from paid-up capital;
• unrealized foreign exchange losses carried forward at year-end;
• doubtful accounts provision deducted in calculating income under Part I of the Taxation Act. Reference: 1138 para. 3.

Line 372 — Provisions whose deduction is not allowed

Enter the provisions, except those for amortization or depletion, that reduced total assets at line 371 and whose deduction is not allowed for establishing the income used in calculating tax.

Line 373 — Mortgage loans

Enter the mortgage loans that reduced the assets shown in the financial statements.

Line 374 — Other amounts that reduced assets and must be included in paid-up capital

Enter all other amounts that are not included in the assets shown in the financial statements, but that must be included in paid-up capital.

Line 379 — Other

When a corporation holds an interest in a partnership or joint venture, total assets must take into account the amounts that would be included in the partnership’s or joint venture’s total assets if it were a corporation.

Line 381 — Provisions for amortization or depletion

If provisions for amortization or depletion are shown on the liabilities side rather than deducted from assets at line 371, enter them at line 381.

Line 382 — Doubtful accounts provisions

If doubtful accounts provisions are shown on the liabilities side rather than deducted from assets at line 371, enter them at line 382.

8. Special deductions from paid-up capital — Lines 393 and 394

A corporation may, if it meets the applicable conditions, claim certain special deductions in calculating its paid-up capital. If it is entitled to one or two of these deductions for the year, it must enter:

• the deduction code in boxes 393i or 394i;
• the amount of the deduction at lines 393 or 394. For the first taxation year of a corporation, these deductions must not be taken into account in calculating the paid-up capital at the beginning of the year using form CO-1136.CS. | Code | Deduction | Section | |---|---|---| | 03 | Deduction relating to an agricultural corporation or a corporation carrying on a fishing business | 1138.1 | | 04 | Deduction for a corporation carrying out a major investment project | 1138.2.2 | | 07 | Deduction relating to an IFC | 1138.2.5 | | 08 | Deduction for a manufacturing corporation | 1138.2.6 |

Code 03 — Agricultural corporation or fishing business

An agricultural corporation or a corporation whose main activity is carrying on a fishing business may deduct $5 million in calculating its paid-up capital. If the corporation is not a member of an associated group of corporations, enter $5,000,000 at line 393 or 394, specify the name of the deduction and enter code 03.

Corporation that is a member of an associated group of corporations

If the corporation is part of an associated group of corporations made up of agricultural corporations or corporations carrying on fishing businesses, its deduction is nil, unless all the corporations have entered into an agreement reported in form Agreement and election relating to the deduction granted to agricultural or fishing corporations (CO-1138.1). In that case, the deductible amount is the one calculated in part 3 of form CO-1138.1.

Corporations associated only through a third corporation

Two corporations associated only because each is associated with a third corporation may each claim a deduction if the third corporation elects to treat them as not associated with each other. This election must be reported in part 4 of form CO-1138.1.

Code 04 — Major investment project

A corporation that benefits from a tax exemption related to the carrying out of a major investment project may claim a deduction in calculating its paid-up capital. This deduction corresponds to the paid-up capital calculated from the balance sheet of the separate business established by the major investment project. The deduction must be entered at line 393 or 394, its name specified, and code 04 entered. The following must be attached to the return:

• a copy of the separate financial statements of the business established by the major investment project;

• a copy of the certificates issued by the Ministry of Finance and Economy, namely:

• the initial eligibility certificate;

• the annual certificate for the reported taxation year. A certificate issued before September 20, 2012 came instead from the Minister of Finance.

Code 07 — Deduction relating to an IFC

A corporation carrying on an international financial centre (IFC) may be entitled to a partial deduction in calculating its paid-up capital. When a corporation is a member of a partnership, whether or not that partnership carries on an IFC, the portion of paid-up capital attributable to the operation of an IFC is determined on the basis of the corporation. Since March 31, 2010, a corporation may waive the deduction relating to an IFC and irrevocably elect to claim the salary tax credit — IFC. For this credit, the form mentioned is Salary tax credit — IFC
(CO-1029.8.36.CI). If the corporation elects, during its taxation year, to benefit from the salary tax credit — IFC, it is entitled to the deduction for operating an IFC only for part of the year. It loses the right to that deduction as of the effective date indicated on the certificate issued by the Ministry of Finance and Economy in respect of the credit, whether the IFC is operated by the corporation itself or by a partnership of which it is a member. If it does not elect the salary tax credit — IFC, it may continue to claim the deduction:

• until December 31, 2012, if it operates an IFC itself;
• until December 31, 2013, if it is a member of a partnership that operates an IFC. To calculate the deduction:
• use schedule 393-07A if the corporation is not a member of a partnership;
• use schedule 393-07B if the corporation is a member of a partnership;
• also use schedule 393-07C if the corporation elects to claim the salary tax credit — IFC during the year. A certificate issued before September 20, 2012 came instead from the Minister of Finance.

Code 08 — Deduction for manufacturing corporation

Since March 13, 2008, a manufacturing corporation may claim a deduction in the
calculation of its paid-up capital. A corporation is considered manufacturing if at least 20% of its activities are manufacturing and processing activities. The proportion used is the PAAF, that is, the proportion of activities attributable to manufacturing and processing activities. This proportion corresponds to the fraction used to calculate manufacturing and processing profits in Canada under section 5200 of the Income Tax Regulations. When a corporation meets the federal conditions to be considered a small manufacturer, its PAAF is deemed to be 100%. The deduction amount depends on the PAAF:

PAAF	Consequence
50% or more	The deduction equals the corporation’s entire paid-up capital for the year
Between 20% and 50%	The deduction is reduced on a straight-line basis
20% or less	No deduction, because the corporation is not considered manufacturing
Schedule 393-08 is used to calculate this deduction.

Special cases and exceptions

1. Corporations having an interest in a partnership or joint venture

In this section, the expression partnership also includes a joint venture.

Amounts that would be included in the partnership’s paid-up capital

A corporation that is a member of a partnership must include in its own paid-up capital its share of the amounts that would be included in the partnership’s paid-up capital if the partnership were a corporation. The calculation is made under sections 1136, 1137 and 1138 of the Taxation Act, but without taking into account the $1 million deduction. Reference: 1136 para. 3. Form Partnership Information Return (TP-600), Schedule
D, may be used to make the calculation. The calculation must be based on the financial statements provided to the members by the partnership. The relevant financial year is the one that ends:

• during the corporation’s taxation year;
• or on the same date as that taxation year.

Calculation of the corporation’s interest in the partnership

To calculate the corporation’s interest in the partnership:

Corporation’s share of the partnership’s income or loss
÷
Partnership’s income or loss

If the partnership has neither income nor loss for its financial year, the calculation must be made as if it had income of $1 million. Reference: 1136 para. 3.

Transactions between the partnership and its members

In calculating the corporation’s paid-up capital, amounts shown in the partnership’s financial statements that arise from transactions between the partnership and its members must not be taken into account. Reference: 1136 para. 3.

Significant influence over a partnership

For the purposes of paid-up capital, a corporation is considered to exercise significant influence over a partnership when its share of profits is at least 20%. In that case:

• it must include its share of the partnership’s undistributed earnings;
• it may deduct its share of the partnership’s unallocated deficit. The corporation does not have to apply this rule if it has accounted for its interest using the consolidation method, because its share of undistributed earnings or unallocated deficit is already included in, or deducted from, its paid-up capital. The corporation also does not have to apply this rule if it can show that it does not exercise significant influence, even if its share of profits reaches 20% or more. Reference: 1136 para. 3.

Correction of information published in earlier versions

Earlier versions of the guide stated that the corporation had to adjust the total assets used to calculate the reduction for investments according to the relevant share. This information, stemming from the budget speech of May 24, 2007 and incorporated into section 1138 of the Taxation Act, was incorrect. The corporation therefore did not have to make that adjustment. If a corporation was disadvantaged by this measure in a past year, it may file form Request for an Adjustment to an Income Tax Return or an Income and Information Return (CO-17.R) for that year. A request is also possible for a past year ended before May 24, 2007, if an asset adjustment had been made in the same way. Bulletins mentioned:

Bulletin	Subject
IMP. 1136-13/R3	Corporation having an interest in a partnership or joint venture
IMP. 1136-14/R3	Transactions between a partnership and its members

2. Paid-up capital used for purposes other than capital tax

Paid-up capital may be used:

• to determine eligibility for certain tax assistance measures;
• to calculate the amount of such assistance;
• for any other purpose provided for under the Taxation Act.

Paid-up capital to be used

The paid-up capital to be used is generally that of the year preceding the year concerned.

For the first taxation year of a corporation, the paid-up capital at the beginning of that year must be used. For a corporation covered by Title I of Book III of Part IV of the Taxation Act, the paid-up capital of the preceding year generally corresponds to the amount at line 399 of the previous year’s CO-1136 form, subject to certain modifications. For the first year, paid-up capital must be calculated using form CO-1136.CS based on the opening balance sheet prepared under GAAP. For a corporation not covered by Title I of Book III of Part IV or that did not complete form CO-1136 in the previous year, for example a cooperative, a cooperative union or a mining corporation that has not reached production stage, the paid-up capital of the preceding year must be calculated with form CO-1136.CS. If the corporation is associated with one or more other corporations in the year concerned, the paid-up capital used for each is the amount calculated on a Canadian or worldwide basis, as applicable, for the last taxation year ended before the beginning of the year concerned. If a corporation in the group is not subject to Quebec tax, its paid-up capital must still be calculated as if it were subject to it.

Forms using paid-up capital for other purposes

Form	Role of paid-up capital	Calculation basis	CO-1136 amounts used
CO-726.30 — Deduction relating to income averaging for forest producers	Eligibility criterion for the deduction	Worldwide basis	Line 399
CO-771 — Calculation of a corporation’s income tax	Element in calculating the small business deduction and the business limit	Canadian basis	Line 399 plus manufacturing deduction, line 393 or 394, code 08
CO-771.1.3 — Agreement between associated corporations respecting the business limit and calculation of that limit	Element in calculating the small business deduction and the business limit	Canadian basis	Line 399 plus manufacturing deduction, line 393 or 394, code 08
CO-1027 — Calculation of corporate instalment payments	Eligibility criterion for quarterly instalments	Worldwide basis	Line 399 plus manufacturing deduction, line 393 or 394, code 08
CO-1029.8.36.IN — Investment tax credit	Element in calculating the reduction applicable to the increase in the basic rate and the refundable portion of the credit	Worldwide basis	Line 392 less the amounts from lines 325 and 348 attributable to a recognized business
CO-1029.8.36.BT — Tax credit relating to a building used in manufacturing or processing activities, small and medium-sized manufacturing enterprise	Element in calculating the credit rate reduction	Worldwide basis	Line 392 less the amounts from lines 325 and 348 attributable to a recognized business
CO-1029.8.36.TI — Tax credit relating to information technology — small and medium-sized manufacturing enterprise	Element in calculating the credit rate reduction	Worldwide basis	Line 392 less the amounts from lines 325 and 348 attributable to a recognized business
CO-1137.A — $1 million deduction	Eligibility criterion for the deduction	Worldwide basis	Line 399 plus manufacturing deduction, line 393 or 394, code 08
CO-1137.E — Agreement respecting the $1 million deduction	Eligibility criterion for the deduction	Worldwide basis	Line 399 plus manufacturing deduction, line 393 or 394, code 08

Procedures and steps

1. Complete the applicable forms

The corporation must determine whether it must complete:

• CO-1136, to calculate paid-up capital for the taxation year;
• CO-1136.CS, to calculate the paid-up capital of the preceding year or the beginning of the first taxation year in the situations provided for.

2. Complete the sections line by line

The corporation must:

1. enter shareholders’ equity and debt items at lines 300 to 325;
2. calculate deductions at lines 331 to 348;
3. determine eligible property at lines 351 to 360;
4. calculate total assets at lines 371 to 382;
5. apply, where applicable, special deductions at lines 393 and 394;
6. determine the final paid-up capital according to the lines of the form.

3. Prepare the list of investments

If a reduction for investments, loans and advances is claimed, the corporation must attach a schedule:

• titled List of investments;
• bearing the number CO-17S.8 in the upper-right corner;
• showing the description, number of shares, class and amount of each eligible investment.

The total of this schedule must equal the amount of eligible property at line 360.

4. Attach the required documents depending on the case

Eligible ship

For the deduction relating to the acquisition or conversion of an eligible ship, attach a copy of the certificate confirming the ship’s eligibility conditions.

Major investment project

For the deduction relating to a major investment project, attach:

• the separate financial statements of the business established by the project;
• the initial eligibility certificate;
• the annual certificate relating to the reported year.

$1 million deduction

To claim the deduction:

• complete CO-1137.A;
• complete CO-1137.E if the corporation is associated with other corporations and an agreement is required.

Associated agricultural corporation or fishing business

If an agreement is required between associated corporations, complete CO-1138.1.

Salary tax credit — IFC

If the corporation waives the deduction relating to an IFC to choose the salary tax credit — IFC, complete CO-1029.8.36.CI.

5. Use the calculation schedules

Schedule 393-07A — IFC, corporation not a member of a partnership

The deduction is calculated according to the following steps:

1. determine the gross income from the IFC activities;

2. divide that income by total gross income;

3. determine the salaries attributable to IFC activities;

4. divide those salaries by total salaries;

5. add the two ratios obtained;

6. divide the result by 2 to obtain the multiplier;

7. multiply the paid-up capital calculated before the IFC deduction by that multiplier;

8. multiply the result by 75%. Simplified formula:

IFC deduction =
Paid-up capital before IFC deduction
× [((IFC gross income / total gross income) + (IFC salaries / total salaries)) / 2]
× 75%

Total gross income excludes:

• interest that constitutes income from property;
• dividends;
• capital gains or losses. Salaries attributable to IFC activities correspond to salaries for the whole year, including those eligible for the exemption from the employer contribution to the HSF and those that would have been eligible if the corporation had not elected the salary tax credit — IFC. The paid-up capital used is the amount calculated before the deduction relating to an IFC. If the corporation does not elect the salary tax credit — IFC, the result is carried to line 393 or 394 with code 07. If it does elect this credit, schedule 393-07C must also be completed.

Schedule 393-07B — IFC, corporation that is a member of a partnership

The deduction takes into account the corporation’s amounts and its share of the partnership’s amounts. Steps:

1. add the gross income from the corporation’s IFC activities and its share of the partnership’s IFC gross income;

2. add the corporation’s total gross income and its share of the partnership’s total gross income;

3. divide the total in point 1 by the total in point 2 to obtain ratio A;

4. add the corporation’s IFC salaries and its share of the partnership’s IFC salaries;

5. add the corporation’s total salaries and its share of the partnership’s total salaries;

6. divide the total in point 4 by the total in point 5 to obtain ratio B;

7. add A and B;

8. divide by 2 to obtain the multiplier;

9. multiply the paid-up capital before the IFC deduction by that multiplier;

10. multiply the result by 75%. Simplified formula:

IFC deduction =
Paid-up capital before IFC deduction
× [A + B] / 2
× 75%

Where:

A =
(IFC gross income corporation + share of partnership IFC gross income)
/
(Total gross income corporation + share of partnership total gross income)

B =
(IFC salaries corporation + share of partnership IFC salaries)
/
(Total salaries corporation + share of partnership total salaries)

The corporation must include its share at the end of the partnership’s last financial year that ends during the corporation’s taxation year or on the same date. This inclusion applies:

• to the partnership’s IFC gross income if the partnership carries on an IFC;
• to the partnership’s total gross income, whether or not it carries on an IFC;
• to the partnership’s IFC salaries if it carries on an IFC;
• to the partnership’s total salaries, whether or not it carries on an IFC.

If the corporation does not elect the salary tax credit — IFC, the result is carried to line 393 or 394 with code 07. If it does elect this credit, schedule 393-07C must be completed.

Schedule 393-07C — Reduced deduction for operating an IFC

When a corporation elects the salary tax credit — IFC during the year, the IFC deduction is reduced according to the number of days before the effective date indicated on the certificate. Formula:

Reduced deduction =
Amount C from schedule 393-07A or 393-07B
×
Number of days in the taxation year before the effective date
/
Total number of days in the taxation year

The result is carried to line 393 or 394 with code 07. A corporation that elects the credit must have obtained a certificate indicating the effective date, even if it already held a qualification certificate to claim the IFC deduction. A certificate issued before September 20, 2012 came from the Ministry of Finance, which has been called the Ministry of Finance and Economy since that date.

Schedule 393-08 — Deduction for manufacturing corporation

If the PAAF is equal to or greater than 50%, enter directly on line 7 of the schedule the paid-up capital calculated before the manufacturing deduction. If the PAAF is less than 50%, complete the schedule. Formula:

Manufacturing deduction =
Paid-up capital before manufacturing deduction
×

[(PAAF 20%) / 30%] −

This formula applies when the PAAF is between 20% and 50%. The result is carried to line 393 or 394 with code 08.

6. Transmission of documents

Forms CO-1136 and CO-1136.CS are related forms to the Corporation Income Tax Return (CO-17). They must be filed with return CO-17. The guide also refers to the Guide to the Corporation Income Tax Return (CO-17.G) for additional information.

Important warnings

• The information in the guide does not constitute a legal interpretation of Quebec or Canadian laws and regulations.
• Form CO-1136 remains mandatory even when the capital tax is 0%, because paid-up capital is used for other tax measures.
• Form CO-1136.CS is mandatory when the corporation carried on a business exclusively outside Quebec during the previous year or when the year concerned is its first taxation year.
• Associated corporations must use the paid-up capital calculated on the appropriate basis for the last taxation year ended before the year concerned.
• Certain deductions must not be taken into account for the first taxation year in calculating the paid-up capital at the beginning of the year with CO-1136.CS, including:
• the $1 million deduction;
• the deductions at lines 393 and 394.
• A tax-exempt corporation cannot claim the $1 million deduction.
• The 120-day holding rule applies to several investments, including certain bonds, certain commercial paper, certain shares related to financial institutions, certain debts and bank acceptances.
• A debt repaid before year-end may be deemed to exist at year-end if the repayment is part of a series intended to improperly reduce paid-up capital.
• No reduction of paid-up capital is allowed for loans, advances, debts, bank acceptances or similar instruments when they are intended to improperly reduce paid-up capital.
• Certain government or non-government assistance payments must reduce eligible costs, but assistance repayments may be added at line 348.
• Investments in membership shares of cooperatives are not considered shares for the purposes of calculating paid-up capital.
• A mutual fund trust unit is not eligible as an investment, unlike a share of a mutual fund corporation if the fund is incorporated.
• Government debts are generally not eligible for the reduction for investments, except that municipal and school authorities are not covered by the definition of government used for this purpose.
• A corporation that holds an interest in a partnership must take into account special rules, including the exclusion of transactions between the partnership and its members.
• Earlier versions of the guide contained an incorrect indication regarding the adjustment of total assets related to partnerships; a disadvantaged corporation may request a reassessment using form CO-17.R.

Summary

The guide explains how a corporation other than an insurance corporation or a financial institution must calculate its paid-up capital using forms CO-1136 and
CO-1136.CS. Even though the capital tax is 0% for years beginning after December 31, 2010, the calculation remains necessary for several tax measures. Paid-up capital includes, in particular, paid-up share capital, surplus, certain provisions, debts, loans, accrued interest, bank acceptances, debts of more than six months and amounts related to partnerships. Deductions may apply, notably for deficits, certain issue costs, mining operations, eligible ships, financing of new vehicles, the $1 million deduction and certain losses or assistance repayments. The corporation may also reduce its paid-up capital by eligible investments, loans and advances, subject to 120-day holding rules, restrictions on financial institutions, anti-avoidance rules and conditions specific to each type of investment. Special rules apply to agricultural corporations, fishing businesses, major investment projects, IFCs and manufacturing corporations, with specific deduction codes at lines 393 and 394. Corporations having an interest in a partnership must include their share of the relevant amounts and apply the specific rules provided. The forms must be filed with return CO-17, together with the schedules, certificates, attestations or agreements required depending on the situation.