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 adjustments made under section 1625 of the 181(3)Handbook to the financial statements of a subsidiary corporation are to be backed out from the subsidiary's financial statements in determining the subsidiary's taxable capital for the purposes of Part I.3 tax.
Position: No.
Reasons: Where section 1625 of the Handbook can be applied and it is determined that it is appropriate to apply the provision, such that the accounting records of the subsidiary are adjusted to reflect the revaluation, the financial statements of the subsidiary, prepared on a non-consolidated basis would reflect the comprehensive revaluation provided for under section 1625 of the Handbook.
XXXXXXXXXX 2001-008583
August 2, 2001
Dear XXXXXXXXXX:
Re: Push Down Accounting & Part I.3 Tax
This is in your reply to your inquiry on the above noted subject addressed to the Sudbury Taxation Services Office, regarding a technical interpretation of the CCRA's position as described in paragraph 15 of IT-532. While written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request, we are prepared to provide the following comments.
Subsection 181(3) of the Act provides that in determining the carrying value of a corporation's assets or any other amount for Part I.3 purposes, it is the amounts reflected in the balance sheet presented to the shareholders and prepared in accordance with generally accepted accounting principles ("GAAP") or, where no balance sheet was prepared or was not prepared in accordance with GAAP the amounts that would be reflected in the balance sheet if one were to be prepared in accordance with GAAP. Paragraph 181(3)(a) provides an exception to the "financial statements prepared in accordance with GAAP" rule in that the "equity and consolidation methods of accounting shall not be used".
The generally accepted authority for GAAP in Canada is the CICA Handbook (the "Handbook"). In considering what is meant by "consolidation method of accounting" we first refer to section 1600 of the Handbook deals with "Consolidated Financial Statements", since there is no definition for this phrase in the Income Tax Act (the "Act"). Section 1600.03 states that "[c]onsolidated financial statements are those produced by aggregating the financial statements of one or more subsidiary companies on a line-by-line basis,...with the financial statements of the parent company, eliminating inter-company balances and transactions and providing for any non-controlling interest in a subsidiary company." From this we interpret the "consolidation method of accounting" to be the method of aggregating the individual financial statements of separate legal entities into one financial statement that reflects the financial position of the economic unit that is comprised of two or more separate legal entities.
In considering the purpose for the phrase "consolidation method of accounting" in subsection 181(3), we consider the technical notes written by the Department of Finance to accompany the legislation when introduced. The technical notes to subsection 181(3) states "[t]he requirement to use amounts reflected in a corporation's balance sheet is subject to an exception in paragraph 181(3)(a) which provides that if the equity or consolidation methods of accounting were used in preparing the balance sheet the amounts used in calculating Part I.3 tax should be those that would be on the balance sheet if these methods were not employed." It would seem reasonable to conclude that the purposes for the exclusion of the equity and consolidation methods is to recognize the fact that under GAAP, financial statements of one legal entity (a parent corporation) may reflect the assets, liabilities, equity and earnings of more than one legal entity due to the application of the equity and consolidation methods of accounting, but the liability to pay capital tax applies to each legal entity on its own. In order to prevent double counting of one legal entity's capital, the equity and consolidation methods of accounting are not to be used.
It is our understanding that where it is determined that it is acceptable to apply the recommendations of section 1625 of the Handbook, and in exercising professional judgement it is determined that it would be appropriate to apply section 1625 of the Handbook, the actual records of account of the subsidiary corporation are adjusted to reflect the comprehensive revaluation of assets and liabilities of the subsidiary at the date it was last acquired. The non-consolidated financial statements of the subsidiary, would reflect the revaluation in accordance with GAAP. It would be the amounts shown in the non-consolidated statements of the subsidiary that in our view, should be used in determining the taxable capital of the subsidiary. This comment applies not only to those amounts to be included in capital but also to any amounts which may be available for an investment allowance.
We hope 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
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