25 February 2002 Internal T.I. 2002-0118117 - PART 1.3 - ADVANCES & HOLDBACKS

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:

Comments with respect to the application of Part I.3 to a number of fact situations as a consequence of the adverse decision in Manufacturer's Life Ins. Co.

Position: See memo.

Reasons: See memo

							February 25, 2002

Income Tax Appeals Division			Income Tax Rulings and
Barry Hassar					Interpretations Directorate
Manager						K. Cooper, LL. B.
							957-8984
Attention: John Kinston
							2002-011811

Part I.3 Issues

This is in response to your memorandum of January 11, 2002 requesting our comments with respect to a number of referrals you had received regarding several outstanding Part I.3 issues. In this regard you enclosed the referrals you had received from the TSO which gave a description of the facts and positions of the parties with respect to the issues discussed. We will not repeat this material herein except as required and will deal with each of the issues in the order they were presented to us.

1. XXXXXXXXXX - Sinking Fund

Our initial opinion provided to the TSO in this matter was based on the view that GAAP did not permit netting in the circumstances. Because the amount in question is long-term indebtedness of XXXXXXXXXX, GAAP does not provide for the netting of such amounts even though they may be aggregated into a single number. The Federal Court of Appeal's decision in H.M.Q. v. The Manufacturer's Life Insurance Company (June 25, 2001), Court file no. A-803-99 (F.C.A.) ("Manulife") does not change our position.

2. XXXXXXXXXX - Advances

This query related to whether CCRA's position with respect to various amounts which were included in capital pursuant to paragraph 181.2(3)(c) by Audit should be changed following the Court's decision in Manulife. Specifically, the amounts in issue, gift certificates, customer credit balances, customer deposits, prepaid cards and AGT Rewards, were included in capital on the basis that they were advances within the meaning of paragraph 181.2(3)(c).

We do not believe that the Court's decision in Manulife has any impact on these issues since they do not involve the consideration of whether an amount is a "reserve" or "other surplus" for capital tax purposes and that the Court's recent decision in Federated Co-Operatives Ltd. v. H.M.Q., 2001 D.T.C. 5414 (F.C.A.) ("Federated Co-op") and other jurisprudence related to the meaning of "advance" is more relevant to the determination of whether the amounts at issue should to be included in capital.

In our view, the amounts received by XXXXXXXXXX in respect of its sales of gift certificates, the customer credit balances, the customer deposits and the prepaid cards are all advances within the meaning of 181.2(3)(b) because:

- the payments were made in return for the agreement of XXXXXXXXXX to provide goods or services in the future (XXXXXXXXXX);

- the payments were made in advance for the eventual performance of the resulting reciprocal obligation, the amount of money the payments represent was available to the corporation which received it, and the payments were an integral part of the financial resources available to XXXXXXXXXX (Oerlikon Aérospatiale Inc. v. H.M.Q., 99 DTC 5318 (F.C.A.); and

- at the time the payments were made, they were payments made beforehand or in anticipation and payments made before the completion of an obligation for which it is to be paid (TransCanada Pipelines Ltd. v. Ontario (Minister of Revenue), [1993] 1 C.T.C. 277 (Ont. C.A.)) - the payments were made before XXXXXXXXXX was required to provide goods or services in return.

With respect to the XXXXXXXXXX, we agree with the representative's submission that in order for there to be an advance there must be a payment and that in these circumstances there is no payment by the customer to the recipient for the services or rebate to be provided under the program.

3. XXXXXXXXXX - Holdbacks Payable

We interpret the Federal Court of Appeal's decision in Manulife to mean that for the purposes of determining whether an amount is included in the capital of a taxpayer as a reserve within the meaning of subsection 181(1) of the Act one must look to the accounting meaning of reserves, provisions, allowances, and other surpluses. The holdbacks payable are clearly not reserves or other surpluses for accounting purposes but it is not clear as to whether they would be considered provisions. Based on a preliminary review of the CICA Handbook, "provisions" and "allowances" are used in a number of contexts but the accounting meaning of these terms is not clear. XXXXXXXXXX.

We trust that these comments are helpful. If you have any questions, or wish to discuss these issues in further detail, please do not hesitate to contact Karen Cooper (613-957-8984) or myself directly.

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate