31 May 2001 External T.I. 2001-0080075 - 1.3 FUTURE INCOME TAX LIABILITY

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 a component of the calculation of deferred taxes under new CICA Handbook section 3465 can be excluded from the computation of capital under subsection 181.2(3).

Position: No. It is the entire amount of both the Future Income Tax Liability and the Future Income Tax Asset as shown on the balance sheet that are to be included in the computation of capital under paragraphs 181.2(3)(b) and (h). It is also the carrying value of all assets and other amounts including amounts added to the carrying value of the asset in relation to adjustments under the CICA Handbook section 3465 that should be used for computing amounts for capital tax purposes, including the investment allowance.

Reasons: The wording of the Act.

		2001-008007
XXXXXXXXXX 	Alison Campbell
		Senior Rulings Officer
May 31, 2001

Dear XXXXXXXXXX:

Re: Future Income Tax Liability ("FITL") and Part I.3 Tax on Large Corporations

This is in your reply to your letter of April 12, 2001 wherein you requested a technical interpretation regarding the computation of a corporation's capital for purposes of Part I.3 of the Income Tax Act (the "Act") and the recent implementation of Canadian Institute of Chartered Accountants Handbook ("CICA HB") section 3465 "Income Taxes" which replaced CICA HB section 3470 "Corporate Income Taxes". Your inquiry dealt with the application of the CICA HB recommendations 3465.43 and 3465.44. We understand that these recommendations apply when an asset is acquired in other than a business combination and the tax basis of that asset at the time of its acquisition is less than its cost. The cost of future income taxes that relate to the difference between tax and book cost at the time of acquisition is required to be added to the cost of the asset in arriving at its carrying value for accounting purposes. Your letter referred to this addition to cost in determining carrying value as a "FITL Bump". The accounting entry to record the FITL Bump would be a debit to the asset and a credit to FITL. You note that the FITL Bump differs from other amounts credited to FITL in that an increase in FITL is generally offset by a charge to income/retained earnings.

It is our view that a corporation's Future Income Tax Liabilities ("FITL") under the new CICA Handbook section 3465 is a provision for deferred taxes and the Future Income Tax Assets ("FITA") are a deferred tax debit. Provisions for deferred taxes are included in the definition of reserves in subsection 181(1) of the Act and are therefore included in the computation of a corporation's capital pursuant to paragraph 181.2(3)(b) of the Act. Deferred tax debit balances are deductible in computing capital under paragraph 181.2(3)(h) of the Act.

Subsection 181(3) of the Act requires that in determining any "amount" to be included in the computation of a corporation's capital, it is the "amount" reflected in the balance sheet of the corporation prepared in accordance with generally accepted accounting principles ("GAAP") and presented to the shareholders of the corporation that is to be used. In our view, it is therefore the entire FITL balance, as shown on the corporation's GAAP balance sheet, which should be used in computing the corporation's capital. It is also the entire amount of any FITA balance shown on the corporation's GAAP balance sheet that would be deducted in computing the corporation's capital in accordance with paragraph 181.2(3)(h) of the Act. There is nothing within the provisions of the Act, which would permit a reduction of the FITL balance shown on the GAAP balance sheet for amounts included therein in respect of a FITL Bump.

It is also our view that in determining the amounts to be included in computing a corporation's investment allowance under paragraph 181.2(4) of the Act it is the carrying value of the asset that is reflected in the balance sheet that would be used. This carrying value would include the amount of any FITL Bump.

With respect to the amortization of a FITL Bump that has been added to the carrying value of a depreciable asset, it is our view that such amortization would be part of an allowance for depreciation. Allowances for depreciation are specifically excluded from the definition of reserves in subsection 181(1) of the Act and accordingly it is our view that the amount of a FITL Bump that is amortized to income/retained earnings would not be added as a reserve under paragraph 181.2(3)(b) of the Act in the computation of a corporation's capital.

We trust our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach