6 December 2000 External T.I. 2000-0056255 - DEBIT RESERVES LARGE CORPORATION TAX

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: The CCRA is asked for its views as to whether a "debit reserve" such as a provision for a pension asset should be deducted in calculating a corporation's capital for LCT purposes.

Position: There is no basis in Part I.3 of the Act as it currently reads for recognizing "debit" or "negative" reserves.

Reasons: The words of subsection 181.2(3) and 181.3(3) only include reserves "to the extent that they were deducted in computing income". This can never be a negative amount. The court in National Trust Company, in considering an analogous provision in Part VI, confirmed this view and noted that a negative amount for reserves would be contrary to the purpose of the provision.

TEI Conference
December 6, 2000

Question XX

Paragraph 181.2(3)(b) of the Act includes in the calculation of the corporation's capital for the year the amount of a corporation's reserves for the year "except to the extent that they were deducted in computing its income for the year under Part I". Thus, the exception permits a reduction in capital - i.e., a reduction in retained earnings when a credit reserve is accrued - as long as the particular reserve is deductible for tax purposes.

The term "reserves" is defined in subsection 181(1) as "the amount at the end of the year of all of the corporation's reserves, provisions and allowances". The definition does not exclude provisions in respect of assets. An example of a provision in respect of an asset is a pension asset calculated in accord with section 3461 of the CICA Handbook. When the provision is established, a "debit reserve" is created and income is recognized for financial statement purposes but not for income tax purposes. In order to provide consistent and symmetrical treatment with credit reserves that are deductible for tax purposes, a "debit reserve" that is not included in taxable income should be deducted in calculating the corporation's capital for LCT purposes. What is the CCRA's view on this issue?

Agency's Position

It is the CCRA's view that there is no basis in Part I.3 of the Act for recognizing a deduction for amounts that have been referred to by some as "debit reserves" or "negative reserves". Subsections 181.2(3) and 181.3(3) include reserves in a corporation's capital except to the extent that they were deducted in computing income for Part I purposes. This calculation can never result in a negative amount due to the use of the phrase "except to the extent of" in those subsections.

This view was echoed by the Federal Court Trial Division in National Trust Company 96 DTC 6234 which considered an analogous provision in Part VI of the Act. In National Trust Company, the court noted that:

"...a reserve....connotes a positive number, or zero; it does not suggest a negative value. Hence, the value of reserves to be included in the computation of capital, pursuant to subparagraph 190.12(b)(iv), cannot be a negative amount. Moreover, a negative amount for reserves would be contrary to the purpose of this provision, which is to calculate the capital upon which the corporation's capital tax is ultimately based".

The CCRA believes that these comments would be equally valid in respect of the treatment of reserves under Part I.3 of the Act.

Author: R. Maley
Division: Financial Industries Division
Telephone: 957-9226