31 March 2000 GST/HST Interpretation 25592 - Assumption Fees Paid Pursuant to an Agreement per Section 191.3, Income Tax Act

Background

Section 191.3 of the ITA generally allows a corporation to transfer all or any portion, as is specified in the agreement, of its Part VI.1 tax liability to certain related corporations provided a joint agreement for the transfer is filed with the Minister of National Revenue. Such transfers are beneficial where the transferor corporation does not have sufficient Part I tax to utilize the deduction that is provided under paragraph (k) of subsection 110(1) of the ITA for Part VI.1 tax payable.

For the purposes of computing the taxable income of a taxpayer for a taxation year there may be deducted from Part I tax, per paragraph (k) of subsection 110(1), 9/4 of the tax payable under subsection 191.1(1) by the taxpayer for the year. Under this subsection there is a tax payable by corporations on dividends paid out on taxable preferred shares.

Schedule 45 (your reference T770), "An Agreement Respecting Liability for Part VI.1 Tax" can be used by a corporation (transferor corporation) to transfer all or part of its Part VI.1 tax liability to a related taxable Canadian corporation (transferee corporation) per section 191.3 of the ITA.

The transferee corporation has to be related to the transferor corporation throughout a taxation year of the transferor corporation and throughout the last taxation year of the transferee corporation ending by the end of that taxation year of the transferor corporation.

An agreement or amended agreement has to be filed by the transferor corporation and the transferee corporation:

•   not later than six months after the end of the transferor's taxation year for which the Part VI.1 tax would otherwise be payable; or

•   not later than 90 days after the mailing of the notice of assessment of Part I or Part VI.1 tax payable (or notification that no tax is payable) to either corporation for the taxation year for which the agreement is filed.

The transferor and transferee corporations have to attach certified copies of the resolutions of the directors, or the documents of persons legally entitled to administer the affairs of the corporation, authorizing such an agreement.

The transferee corporation has to include the amount of tax specified in this agreement in its Part VI.1 tax payable, and the transferor corporation will deduct this amount from its Part VI.1 tax otherwise payable. Both corporations remain jointly and severally liable to pay the tax specified in this agreement including any interest and penalties on this amount of tax.

It is assumed based on the documentation provided, that the companies in question have met the necessary requirements of section 191.3 of the ITA and that this is not an issue in dispute.

An "assumption fee" is an amount payable to the transferor corporation, as agreed to by the transferee corporation for assuming the Part VI.1 tax liability of the transferor corporation. It is not a requirement of the ITA. In this case the assumption fee was calculated at rates XXXXX of the amount of Part VI.1 tax liability transferred. Those amounts and the companies involved are shown in a "Notice of Assumption" attached to the agreements between the companies. For the years 1995 through 1997, Division VI.1 tax payable of XXXXX was transferred and assumption fees of XXXXX were paid by the transferee corporations. In the year 1997, Division VI.1 tax payable transferred was XXXXX and assumption fees of XXXXX were paid.

You are requesting our views on the tax status of the assumption fee.

Our Comments

Included in the definition of debt security are "accounts receivable" as they are financial obligations representing a right to be paid money (GST/HST Memoranda Series 17.1 Definition of "Financial Instrument"). Since "accounts payable" are also financial obligations representing a right to be paid money but on the other side of the mirror of accounts receivable, they are also necessarily included in the definition of debt security. Therefore, the assumption fees paid are in respect of a financial service provided as per paragraph (d) of the definition of financial services and consequently are exempt supplies pursuant to section 1, of Part VII of Schedule V of the ETA.

Should you have any questions do not hesitate to contact me at 613-952-8811.

John Nowak