24 June 1998 External T.I. 9802425 - RESERVES FOR LCT PURPOSES

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: Are differences between GAAP and tax that are related to paragraph 20(1)(e) type expenses reserves for LCT purposes.

Position: No.

Reasons: The cost has been incurred - the fact that such amount may not be immediately deductible or deductible at all for tax purposes doesn’t necessarily make the non-deductible portion a reserve.

XXXXXXXXXX 		980242

Attention: XXXXXXXXXX

June 24, 1998

Dear Sirs:

Re: Share/Debt Issue Costs and Large Corporations Tax

This is in reply to your letter dated January 27, 1998, concerning the consequences under the Income Tax Act (the Act) where the income tax treatment for outlays or expenses that are subject to paragraph 20(1)(e) of the Act differs from their accounting treatment under generally accepted accounting purposes (“GAAP”).

In the example in your letter you indicated that a taxpayer may incur financing costs of $30,000 that would be deductible on a straight line basis over 5 years pursuant to paragraph 20(1)(e) of the Act. Your question is whether an adjustment would be required to be made to the calculation of capital of a corporation in subsection 181.2(3) of the Act in respect of that portion of the financing costs that are not deductible for income tax purposes until a subsequent taxation year.

Our Comments

Paragraph 181.2(3)(b) of the Act requires a corporation (other than a financial institution) to include in its capital the amount of its reserves for the year except to the extent that they were deducted in computing its income under Part I of the Act. For these purposes reserves are defined in subsection 181(1) of the Act as meaning all of a corporation’s reserves, provisions and allowances other than allowances in respect of depreciation and depletion but including deferred income taxes. The definition of reserve in subsection 181(1) of the Act in our view is broader than the accounting concept of a reserve (which is generally limited to an appropriation of retained earnings). For example, where amounts are, appropriated from capital (including retained earnings), charged to income in respect of future or contingent expenditures or are in fact earned for income tax purposes but not under GAAP, such amounts will generally constitute a reserve.

The fact that an amount is not currently deductible for income tax purposes does not necessarily mean that such amount constitutes a reserve within the meaning of subsection 181(1) of the Act. For the purpose of computing the capital of a corporation pursuant to 181.2(3) of the Act it is generally our view that no adjustment would be made for any difference that may arise between an amount deducted under paragraph 20(1)(e) of the Act and the amount deducted under GAAP.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996 and are not binding on the Department in respect of any particular situation.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch