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: (i) Whether the sale of accounts receivable is on income or capital account where it is not part of the sale of the entire business. (ii) Whether the gain on the collection of accounts receivable is on income or capital account.
Position: (i) Income. (ii) Income.
Reasons: (i) In addition to the Agency's administrative position in paragraph 8 of IT-188R, at the 1999 APFF we stated that, generally, it is our view that the sale of accounts receivable, other than as part of the selling of a business, is income.
(ii) Based on IT-459, the transaction is an adventure or concern in the nature of trade.
XXXXXXXXXX
XXXXXXXXXX 2000-000892
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear XXXXXXXXXX:
RE: XXXXXXXXXX ("Corp A") XXXXXXXXXX
XXXXXXXXXX ("Corp B") XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-mentioned taxpayers. We also acknowledge receipt of your correspondence dated XXXXXXXXXX, which was further to our request for additional information.
To the best of your knowledge, and that of the taxpayers involved, none of the issues involved in the ruling request is:
i. in an earlier return of the taxpayers or a related person;
ii. being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayers or a related person;
iii. under objection by the taxpayers or a related person;
iv. before the courts or, if a judgment has been issue, the time limit for appeal to a higher court has not expired; and
v. the subject of a ruling previously issued by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, the proposed transaction, and the purpose of the proposed transaction is as follows:
Facts
1. Corp A is a professional corporation incorporated under the laws of XXXXXXXXXX.
2. Corp A is authorized by the XXXXXXXXXX to conduct the business of XXXXXXXXXX.
3. Corp A is wholly owned by XXXXXXXXXX.
4. Corp B is a professional corporation incorporated under the laws of XXXXXXXXXX.
5. Corp B is authorized by the XXXXXXXXXX to conduct a XXXXXXXXXX business.
6. Corp B is wholly owned by XXXXXXXXXX.
7. XXXXXXXXXX are husband and wife.
8. Corp A provides administrative services to Corp B including the collection of delinquent accounts receivable, the provision of legal advice and consultation to ensure the proper maintenance of plant and equipment.
9. Corp A charges Corp B a fee for these services.
10. In addition to XXXXXXXXXX, Corp B has invested in a number of business ventures. These investments has placed increased demands on Corp B's cash flow.
Proposed Transaction
11. Corp A and Corp B will enter into an alternate agreement with respect to Corp B's trade accounts receivables whereby Corp A will acquire these receivables at a discount. The amount of the discount will be the same as discounts charged by other arm's length commercial discounters. (You have been advised that the commercial rate is 6 - 10% for 45 days for accounts like this.) Corp A will remit the discounted purchase price of the accounts receivable balance immediately to Corp B. Corp A will be responsible for all collection and legal activities associated with the accounts receivable purchased from Corp B. Corp A will have the option of refusing to acquire specific accounts receivable to avoid assuming unnecessary risks. Corp A will earn no fees on this factoring arrangement, but rather its income on this transaction will come in the form of the difference between the total amount it collects on the accounts receivables it purchases and the amount paid to Corp B for these balances. All administrative collection costs such as staff, office supplies, legal, etc., with respect to the accounts receivable balances will be borne by Corp A. Corp A will obtain third party financing to fund its purchase of Corp B's trade accounts receivables.
Purpose of the Proposed Transaction
12. The purpose of the proposed transaction is to provide Corp B with cash to conduct its business operations.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transaction, and purpose of the proposed transaction, and the proposed transaction is completed as described above, our rulings are as follows:
A. Corp B's loss on the sale of its accounts receivables to Corp A will be a deductible business expense for Corp B pursuant to subsection 9(1) and paragraph 18(1)(a) of the Income Tax Act.
B. The gain, if any, realized by Corp A on the collection of the accounts receivable purchased from Corp B will be included in computing Corp A's business income pursuant to subsection 9(1) of the Act.
Caveat
Nothing in this ruling should be construed as implying that Canada Customs and Revenue Agency has agreed to or reviewed:
(a) the determination of the fair market value rate used in discounting the trade accounts receivable;
(b) the tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
The rulings provided herein are subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
??
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000