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.
Principal Issues: Whether legal and accounting fees associated with a business combination reported under ASPE have to be capitalized.
Position: Yes.
Reasons: 1) ASPE is not law. 2) In seeking to determine profit, the goal is to obtain an accurate picture of the taxpayer's profit, for purposes of Section 9 of the Income Tax Act (the "Act"). In the Supreme Court of Canada decision in Canderel Limited v. The Queen, 98 DTC 6100, Docket: 24663, the court concluded that the computation of profit is a matter of law, and that GAAP is an interpretative aid external to the legal determination of profit.
XXXXXXXXXX
John Parker CMA
2012-043508
February 27, 2012
Attention: XXXXXXXXXX
Dear XXXXXXXXXX :
Re: Accounting Standards for Private Enterprises ("ASPE") Business Combination Costs
We are writing in response to your letter of January 23rd 2012 wherein you asked our opinion on whether legal and accounting fees associated with a business combination reported under ASPE have to be capitalized for tax purposes. Our understanding of the facts in the hypothetical situation is as follows:
- A taxable Canadian corporation, resident in Canada, has made the transition to Accounting Standards for Private Enterprises ("ASPE") from Canadian Accepted Accounting Principles ("GAAP").
- The corporation incurred costs associated with a business combination that previously under Canadian GAAP would have been capital in nature relating to the acquisition of capital property. Under ASPE 1582.55 however, the costs are not capitalized and are treated as an expense in the period in which they occur.
- Legal and accounting fees relating to acquisition of capital property were previously treated as capital in nature for income tax purposes.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
In regard to your hypothetical situation, if prior to the transition from GAAP to ASPE, the accounting and legal fees relating to a business combination would have been capitalized as required by the Act, then after the transition they would still have to be capitalized. As the Supreme Court of Canada stated in Canderel Limited v. The Queen, 98 DTC 6100, the computation of profit is a question of law. Accounting standards are not law but are interpretative aids that are external to the legal determination of profit. In seeking to ascertain profit, the goal is to obtain an accurate picture of a taxpayer's profit, for the purposes of sections 3 and 9 of the Act.
Paragraph 18(1)(b) of the Act entitled "Capital outlay or loss" denies a deduction for capital outlays except as expressly permitted under Part I of the Act. Interpretation Bulletin IT-99R5 entitled "Legal and Accounting Fees" Para. 14 states that "legal and accounting fees incurred on the acquisition of capital property are normally included as part of the cost of the property".
The CRA's current position on how the new accounting framework will affect an enterprise's tax reporting is published in Income Tax Technical News ("ITTN") Issue No. 42 dated May 31, 2010. The Income Tax Technical News can be found on the Canada Revenue Agency's website at www.cra.gc.ca .
We trust that our comments will be of assistance.
Yours truly,
Doug Watson
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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