18 July 2002 External T.I. 2002-0140985 - FARM CORPORATION AND LCT

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:

Whether a farm corporation that has elected to use the cash method of computing income for Part I purposes should use GAAP based financial statements in calculating its capital base for Part I.3 purposes.

Position:

Subsection 181(3) provides that a corporation's balance sheet prepared in accordance with GAAP is to be used in determining the carrying value of the corporation's assets or any other amount for Part I.3 purposes.

Reasons: Legislation.

XXXXXXXXXX 								2002-014098

July 18, 2002

Dear XXXXXXXXXX:

Re: Farm Corporations and Part I.3 Tax

This is in reply to your letter of May 14, 2002 wherein you requested our interpretation with respect to the application of Part I.3 of the Income Tax Act (the "Act") to farm corporations that have elected to use the cash method of reporting income pursuant to section 28 of the Act. Your concern is that the use of GAAP based financial statements for Part I.3 purposes would result in a higher capital base due to the different treatment accorded to inventory under GAAP and under the cash method. In your view, the appropriate result would be to exclude unsold inventory from the capital base of farm corporations using the cash method.

Section 28 of the Act allows a taxpayer to elect to compute income from a farming business using the cash method instead of the accrual method of accounting. Paragraph 28(1)(b) of the Act provides for an optional inventory adjustment which may be used to reduce a taxpayer's loss from a farming business and paragraph 28(1)(c) of the Act provides for a mandatory inventory adjustment when certain conditions are met. Section 28 of the Act applies for the purpose of computing the taxpayer's income under Part I.

Part I.3 of the Act imposes a tax of 0.225% on the amount by which a corporation's taxable capital employed in Canada exceeds its capital deduction. 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) of the Act 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".

In the situation described, it is our view that the amount of the farm corporation's retained earnings as reflected in its balance sheet prepared in accordance with GAAP should be included in calculating its capital in accordance with subsection 181(3) of the Act. This is so notwithstanding that income in respect of a farming business under GAAP may be a different amount than that for Part I purposes.

With regard to subsection 181(4) of the Act, as indicated in paragraph 19 of Interpretation Bulletin IT-532, this provision operates to ensure that a particular item will be included in, or deductible from, a taxpayer's capital base only once. In our view, there is nothing in the wording of subsection 181(4) of the Act that suggests that limitations set out in some other Part of the Act would override the specific rules in section 181 for the purpose of calculating the capital base for Part I.3 purposes.

Since your concern appears to be more a question of tax policy, we would recommend that you send your views to the Department of Finance as the setting of tax policy and making legislative amendments is within their mandate.

We trust that our comments will be of assistance to you. However, as stated in paragraph 22 of Information Circular 70-6R5, this opinion is not a ruling and consequently is not binding on the Canada Customs and Revenue Agency.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch