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:
Whether the non-deductible portion of an allowance for impaired loans should be included in computing the capital of a financial institution as a reserve under subparagraph 181.3(3)(a)(iii).
Position:
Yes.
Reasons:
A financial institution in respect of which subparagraph 181.3(3)(a)(iii) applies is required to include in its capital tax base the amount of its reserves for the year except to the extent they were deducted under Part I. Accordingly, where an allowance for impaired loans exceeds the tax reserve deducted under subparagraph 20(1)(l)(ii), the excess will be included in computing capital under subparagraph 181.3(3)(a)(iii).
XXXXXXXXXX 2000-001785
Attention: XXXXXXXXXX
June 2, 2000
Dear Sirs:
Re: Capital of Financial Institutions
This is in reply to your letter dated March 28, 2000 wherein you requested our views with respect to the application of subparagraph 181.3(3)(a)(iii) of the Income Tax Act (the "Act") to an allowance for impaired loans reported by a financial institution for accounting purposes.
You indicate that most of the financial institutions have in their financial statements an allowance for impaired loans. For income tax purposes, subparagraph 20(1)(l)(ii) of the Act permits a reserve to be claimed in respect of impaired loans. To the extent that the allowance for impaired loans determined in accordance with generally accepted accounting principles ("GAAP") is not deductible for tax purposes under subparagraph 20(1)(l)(ii) of the Act, your question is whether the non-deductible portion is a reserve that should be included in computing the capital of the financial institution for Part I.3 purposes.
A financial institution in respect of which subparagraph 181.3(3)(a)(iii) of the Act applies is required to include in computing its capital for a taxation year the amount of its reserves for the year, except to the extent that they were deducted in computing its income under Part I for the year. For this purpose, "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.
In our view, where an allowance for impaired loans deducted for GAAP purposes exceeds the tax reserve deducted under subparagraph 20(1)(l)(ii) of the Act, the excess will be included as a reserve in computing the capital of the financial institution pursuant to subparagraph 181.3(3)(a)(iii) of the Act.
While we hope that our comments will be of assistance to you, they are given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and are not binding on the Agency in respect of any particular situation.
Yours truly,
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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