9 May 2001 Internal T.I. 2000-0006587 - CASH PURCHASE TICKETS PART 1.3

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: Application of Part I.3 of Act to outstanding cash purchase tickets (CPTs) and deferred cash purchase tickets (DCPTs).

Position: Where the cheque is currently dated, the only capital to the issuer resulting from the transaction would be the capital represented by any bank overdraft resulting from the issuance of the cheque. Where the cheque is post-dated, the capital of the issuer would generally be the amount represented by the CPT, except in rare circumstances where the post-dated cheque is accepted in full settlement of the indebtedness represented by the CPT, in which case the issuer's capital would be the amount represented by the post-dated cheque. Where the CPT itself is post-dated, the issuer's capital is the amount of indebtedness represented by the CPT.

Reasons: As we understand it, it is industry practice to issue CPTs together with detachable cheques. The CPTs formally constitute notes. Where a cheque is currently dated, the note is paid immediately upon issuance of the cheque. Where a cheque is post-dated, the note would generally remain outstanding until the earlier of the date on the face of the cheque and the date that the cheque is actually honored for payment. In rare circumstances where the CPT is settled upon the issuance of a post-dated cheque, our view is that the cheque is a "similar obligation" for the purposes of paragraph 181.2(3)(d). Where the CPT itself is post-dated, our view is that it nonetheless constitutes indebtedness represented by a note for capital tax purposes, as the indebtedness arises upon delivery of the grain or redemption of the grain storage ticket, whichever is the case.

May 9, 2001

WINNIPEG TSO						HEADQUARTERS
R. Maley
Attention:  Gary Yip						(613) 957-9226

2000-000658
Part I.3 - Cash Purchase Tickets

This is in reply to your correspondence of February 7, 2000 regarding the application of Part I.3 of the Act to outstanding cash purchase tickets (CPTs) and deferred cash purchase tickets (DCPTs) at the year-end of their issuer and requesting our comments in that respect on the Joint Position Paper prepared by the Winnipeg and Regina Tax Services Offices. We apologize for our delay in responding.

A CPT is defined in The Canada Grain Act (Endnote ¹) as

...a document in prescribed form issued in respect of grain delivered to a primary elevator, process elevator or grain dealer as evidence of the purchase of the grain by the operator of the elevator or the grain dealer and entitling the holder of the document to payment, by the operator or grain dealer, of the purchaser price stated in the document.

As we understand it, farmers who regularly receive CPTs in payment for their grain are in the habit of requesting that their CPTs be deferred until after the end of the year. This is generally accomplished simply by indicating a future date on the face of the CPT thus making it payable at a future time. As the farmers are generally on a cash, rather than accrual basis, this enables them to defer the income in respect of their grain until the following taxation year. Subsection 76(4) expressly excludes these DCPTs from the application of section 76 which would otherwise apply to include the value of the CPT in the farmers' income in the year the CPTs are received.

As we understand it, CPTs are notes that are generally issued together with a cheque as payment for the indebtedness represented by the note. It is our view that, where the cheque is currently dated, the note is paid immediately upon issuance of the cheque, and the only capital to the issuer resulting from the transaction would be the capital represented by any bank overdraft resulting from the issuance of the cheque. Where the cheque is post-dated, if the note remains outstanding our view is that the capital of the issuer is the amount represented by the CPT. If the note does not remain outstanding, our view is that the capital of the issuer is the full amount represented by the post-dated cheque. Where the CPT itself is post-dated, the issuer's capital is the amount of indebtedness represented by the CPT. Our detailed comments follow.

Analysis

1. What is a "note"? What is a "cheque"?

The referral indicates that CPTs and DCPTs are "like cheques" in that they are negotiable instruments that can be taken to a bank by the holders. This view was echoed by the Federal Court of Appeal in Saskatchewan Wheat Pool (Endnote ²). However, it is to be noted that neither the referral, nor that court, considered whether the CPTs constitute cheques as a matter of law. It is the legal nature of an amount that determines its treatment for capital tax purposes: Autobus Thomas Inc.(Endnote ³).

In Canada, the legal meaning of a "cheque" is defined in subsection 165(1) the Bills of Exchange Act (Endnote ⁴) as a bill drawn on a bank, payable on demand. Subsection (2) provides that, unless otherwise provided in that Part, the provision in the Act applicable to bills payable on demand apply to a cheque.

Subsection 16(1) of the Bills of Exchange Act (Endnote ⁵) defines a bill as follows:

A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer.

Bills and cheques are three party instruments in that they formally require a drawer, the person who issues the instrument, a drawee, the person to whom the order is given, and a holder, the person to whose order the payment is to be made. Subsection 18(1) provides that a bill may be drawn payable to, or to the order of, the drawer, or it may be drawn payable to, or to the order of, the drawee. If a bill is to constitute a cheque, however, subsection 165(1), noted above, requires that the drawee be a bank.

A promissory note, on the other hand, is a two-party instrument. Subsection 176(1) of the Bills of Exchange Act defines a promissory note as follows:

A promissory note is an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.

In other words, a note formally requires only a drawer and a holder.

For capital tax purposes, the reference to a "note" means a promissory note as defined in the Bills of Exchange Act. For example, see Federated Co-operatives Limited (Endnote ⁶).

2. What is a CPT?

There has been some confusion as to whether the CPTs are cheques, are notes, or are a hybrid instrument consisting of both a note and a cheque. The Canada Grain Act prescribed form for a CPT (Endnote ⁷) appears to be a note, in that is does not provide for a drawee on its face. Rulings opinion E9803437 states that a CPT is "evidence of indebtedness" and indicates that, where a cheque is attached to a CPT, it does not form part of the CPT. Rulings opinion E9624775, on the other hand, described a DCPT as "essentially a post-dated cheque", which may be viewed as suggesting that a CPT is a cheque.

Our information is that grain operators generally issue CPTs with a cheque attached, and that the Canada Grain Commission generally would not approve the form of a grain operator's CPT unless it had a detachable portion with the operator's banking information imprinted thereon (Endnote ⁸). Your recent correspondence confirms that it is also your understanding that, in practice, the standard documents presented on delivery of grain is a document, one side of which is a prescribed CPT, the other side of which is a cheque. The cheque is detached and presented to a bank for payment. The CPT is retained as a receipt (Endnote ⁹).

While it appears to be commercial practice to refer to both the CPT and the cheque together as "a CPT" (and the Joint Position Paper appears also to discuss the CPT and the cheque as if they were a single instrument), our view is that there are two instruments generally issued on delivery of grain, one of which is a note and one of which is a cheque. Therefore, we will be distinguishing between the two instruments in this note by referring to the note/receipt portion as the CPT and the detachable portion as a cheque (Endnote ¹⁰). For clarity, we will refer to DCPTs as post-dated CPTs.

3. What is the capital tax consequences of issuing CPTs?

A corporation's capital includes the amount of its indebtedness outstanding at the end of the year represented by bonds, debentures, notes, mortgages, bankers' acceptances or similar obligations: 181.2(3)(f).

In view of the common practice of issuing CPTs and cheques together, there would appear to be three situations that could reasonably arise commercially (although it is not known if all are occurring in actual practice):

1. The CPT and cheque could both be dated currently upon delivery of the grain;

2. The CPT could be currently dated, with the cheque post-dated to a time after the end of the holder's taxation year; and

3. Both the CPT and cheque could be post-dated.

In our view, where the CPT and cheque are both dated currently, there is no outstanding indebtedness in respect of the note, as the cheque represents immediate payment thereof (Endnote ¹¹). Therefore, there would be no capital to the issuer of the note resulting from the transaction, except to the extent that the cheque places the issuer in an overdraft position with its bank at year-end (Endnote ¹²).

Where the CPT is currently dated and the cheque post-dated, our view is that the indebtedness represented by the CPT would likely remain outstanding until the date of the cheque. Section 6 of IT-433R, "Farming or Fishing - Cash Method", provides that a post-dated cheque will normally be accepted as security for a debt without extinguishing the original debt. Where such a debt is an income debt then payable, the value of the post-dated cheque will be brought into income at the earlier of the date that the cheque is payable and the date the cheque is negotiated.

IT-433R further notes that, in rare cases, a post-dated cheque may be accepted in absolute payment of a debt, in which case its value would be considered income at the time it is received rather than at the later time that it is dated. However, this would only be the case where the holder's recourse on the debt is extinguished upon acceptance of the post-dated cheque. In these rare circumstances, in our view, the post-dated cheque would constitute indebtedness of the issuing corporation that is a "similar obligation" within the meaning of paragraph 181.2(3)(d).

If both the CPT and the cheque are post-dated, our view is that the amount of the CPT represents indebtedness of the issuing corporation represented by a note. This is because the indebtedness represented by the CPT arose on the delivery of the grain (or, where an elevator receipt is received on delivery, the indebtedness arises upon surrender of the elevator receipt: see section 68 of the Canada Grain Act) and there is no requirement under paragraph 181.2(3)(d) of the Income Tax Act that the indebtedness be immediately payable.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

F. Lee Workman
Manager
Financial Institutions Team
Financial Institutions Division
Income Tax Rulings Directorate

ENDNOTES

¹ Statutes of Canada, c. G-10, s. 2.

² IT-184R "Deferred Cash Purchase Tickets Issued for Grain"

³ 99 DTC 259 (TCC) affd on appeal 2000 DTC 6299 (FCA).

⁴ Statutes of Canada, c. B-4.

⁵ Statutes of Canada, c. B-4.

⁶ 2000 DTC 1946 (TCC).

⁷ Form 6, Schedule V, Canada Grain Act, R.S.C. c. G-10.

⁸ Letter dated April 23, 2001 from F. Hodgkinson, Canada Grain Commission, to Gary Yip, CCRA.

⁹ E-mails from Gary Yip, TSO dated April 9, 2001 and May 2, 2001.

¹⁰ It may be noted that the letter from Mr. Hodgkinson, see 9 supra, refers to the cheque as the "negotiable portion". I am using the word "detachable portion" instead, in view of the fact that the Canada Grain Act provides that the CPT itself is negotiable unless the words "Not Negotiable" appear on its face: see section 111 of that Act.

¹¹ Section 5, IT-433R, "Farming or Fishing - Cash Method", provides that the value of a cheque that is received by a taxpayer using the cash method is considered to be income at the time the cheque is received from a person who was indebted to the taxpayer...provided that the debt is payable at the time the taxpayer receives the cheque, the debt would be income to the taxpayer is repaid in cash, the cheque is not subject to conditions (such a post-dating) and the cheque is honored on presentation for payment.

¹² See section 34, IT-532 "Part I.3 - Tax on Large Corporations".