7 May 1995 Administrative Letter 951022A - PART I.3, ADVANCES

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:

(1)For Part I.3 tax purposes, why the department makes a distinction between cheques that constitute a payment as opposed to those that do not.

(2)Whether an overdraft can result with respect to outstanding cheques (before presented to bank).

(3)Whether an amount billed in advance and not received by year end for services to be rendered in a subsequent year is to be included in capital under subsection 181.2(3).

Position TAKEN:

(1)The department does not make the distinction. The distinction is founded in common and civil law.

(2) Yes.

(3) Depends upon facts.

Reasons FOR POSITION TAKEN:

(1)The common law conditional payment principle deterimnes the date of payment as the date of delivery of the cheque by a debtor to his or her creditor. Under Civil law the date of payment is the date in which the cheque is honored by the bank.

(2) We consider that the writing of a cheque by a corporation which has overdraft privileges represents tacit approval and acknowledgement by the bank

(3) The advance billing would not be considered a loan or advance pursuant to paragraph 181.2(3)(c) but may depending upon the specific facts fall within one of the other paragraphs of subsection 181.2(3).

Revenue Canada Round Table

Tax Executive Institute Conference
May 7-10, 1995

Question 23

TAX ON LARGE CORPORATIONS - ADVANCE BILLINGS

When a corporation bills its customers in advance for services to be rendered in the coming year and the bill remains unpaid at year-end, could you please confirm that the amount of the advance billing is not included in taxable capital for tax on large corporations purposes?

Department's Position

Paragraph 181.2(3)(c) includes "the amount of all loans and advances to the corporation at the end of the year", in the "capital of a corporation", for purposes of determining tax payable under Part I.3 of the Income Tax Act.

The term "advance" often means simply "pay" or "pay money before it is due". Black's Law Dictionary (6 ed) defines the term "advance" as "moneys paid before or in advance of the proper time of payment". In the case of TransCanada Pipelines Limited v. The Minister of Revenue (Ontario), (1992) 62 O.A.C. 105, the Ontario Court of Appeal quoted with approval from the Dictionary of Business and Finance (1957) at page 9 as follows:

... the definitions of "advance"... as a "payment made beforehand or in anticipation" and a "payment made before... the completion of an obligation for which it is to be paid".

Accordingly an advance billing, that remains unpaid at year end, with respect to services to be rendered in a subsequent year would not be considered as an advance for purposes of paragraph 181.2(3)(c).

A review of the specific facts including the basis on which such amount is reflected in the balance sheet would be necessary to determine whether this amount would be included in capital by virtue of the other provisions of subsection 181.2(3).

Author: G. Donell
File: 951022
Date: April 26, 1995Y