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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: In light of the Manulife decision and the CCRA's decision to not seek leave to the Supreme Court, will the CCRA accept that GAAP determines both the amount as well as the characterization of items for LCT purposes?
Position: We will assess the implications of the Manulife decision with respect to cases under appeal and our position in IT-532 but a final determination will not be made until the Supreme Court hands down its decision in the Autobus Thomas case.
Reasons: Jurisprudence
Large Corporations Tax - Capital Tax Cases
Question
Since the CCRA has not sought leave to appeal the Manufacturers Life Insurance Co. v. The Queen (2001 DTC 5396) (Manulife) decision, will you now accept that general accounting and auditing principles (GAAP) determine both the amount of the item reflected in the financial statements as well as the characterization of the item for purposes of the large corporations tax? In other words, the CCRA must accept the accounting characterization of items that are properly reflected in the financial statements under GAAP.
Response
The basic issue in Manulife, as well as in the The Queen v. Royal Trust Corporation of Canada (2001 DTC 52, [2001] 3 CTC 2268) and PCL Construction Management Inc. v. The Queen (2000 DTC 2624, [2001] 1 CTC 2132) cases, which are presently under appeal to the Federal Court of Appeal, is the role of GAAP in determining the character of amounts for Part I.3 purposes. In our view, it is the intent of the law to include in the capital of a taxpayer gains that have been realized and therefore form part of the available capital of the corporation. Similarly, assets owned by a taxpayer that are leased by it in the course of carrying on its business clearly constitute tangible property employed in the taxpayer's business. We recognize that these recent decisions have created uncertainty as to the CCRA's position that the nature of an amount reflected in the balance sheet is determined with regard to legal principles and is not limited to the characterization of the amount for accounting purposes.
As you know, the Supreme Court will only hear issues of national importance. With the assistance of our Justice advisors, it was concluded that Manulife did not raise an issue of national importance and thus, we did not seek leave to the Supreme Court.
As a consequence, the CCRA will be assessing the implications of this decision as it relates to cases under appeal and with regard to our position expressed in IT-532. We will not have the full picture until the Supreme Court hands down its decision in the Autobus Thomas case, which is scheduled to be heard in mid-October. In Autobus Thomas Inc. The Queen (2000 DTC 6299), the courts dealt with the legal characterization of the contractual relationship between the bank and the taxpayer in connection with new vehicle purchases. In doing so, they had to take the analysis further than the title given to a particular item in the financial statements.
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