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:
Are stock-based compensation amounts, as described in section 3870 of the CICA Handbook, included in capital for the purposes of Part I.3 and Part VI of the Act?
Position: Yes
Reasons:
181.3(3)(a)(ii) and 190.13(a)(ii) includes in the calculation of capital, among others, the amount of retained earnings and contributed surplus. It is now our position that where terminology used in Part I.3 derives its meaning from accounting concepts, the accounting meaning of the term will determine whether the item is to be included in capital.
XXXXXXXXXX 2002-014916
A. St-Amour, CA
August 26, 2002
Dear XXXXXXXXXX:
Re: Part I.3 Tax and Part VI Tax- Employee Stock Options
This is in response to your letter of June 24, 2002 requesting our opinion on the impact of the accounting treatment created by the application of section 3870 of the CICA Handbook - stock-based compensation and other stock-based payments - on the determination of the capital of financial institutions for purposes of Part I.3 and Part VI of the Income Tax Act (the "Act").
In your letter, you mentioned that, in accordance with section 3870 of the CICA Handbook, the employer charges the fair value of the option to its income statement (reducing retained earnings) and credits contributed surplus with the balancing or offsetting entry. You also indicated that the OSFI statements mirror this treatment.
As you know, subparagraph 181(3)(b)(ii) of the Act provides that in the case of a bank or insurance corporation that is required by law to report to OSFI or a similar provincial authority, the amounts reflected in the balance sheet accepted by OSFI are to be used in determining the carrying values and other amounts under Part I.3 of the Act. Subsection 312(1) of the Bank Act requires a bank to send to OSFI a copy of its annual financial statements. Subsection 308(4) of the Bank Act provides that, except as otherwise specified by OSFI, the annual financial statements must be prepared in accordance with generally accepted accounting principles ("GAAP"), the primary source of which is the CICA Handbook. Accordingly, for the purpose of this letter, we will assume that the accounting treatment described above constitutes the appropriate treatment accepted by OSFI.
The issue then is whether the stock-based compensation amounts which, as noted above, are credited to contributed surplus for accounting purposes, would be included in the calculation of capital pursuant to subparagraph 181.3(3)(a)(ii) of the Act as "contributed surplus".
As a result of various recent jurisprudence, it is now our view that where terminology is used in Part I.3 of the Act that derives its meaning from accounting concepts, the accounting meaning of the term will determine whether the item is to be included in capital. The terms "contributed surplus" and "retained earnings" derive from accounting concepts (see section 3250 - surplus). Therefore, we are of the view that to the extent that the amount of the stock-based compensation is reported as contributed surplus it would be included in the capital pursuant to subparagraph 181.3(3)(a)(ii) of the Act as "contributed surplus". On the other hand, the amount of the retained earnings (reduced by the stock-based compensation expense) would be included in computing capital pursuant to subparagraph 181.3(3)(a)(ii) of the Act.
Subsection 190(2) of the Act provides that subsection 181(3) of the Act applies to Part VI with such modifications as the circumstances require and, accordingly, we are of the view that it is appropriate to reflect the same treatment as described in the previous paragraph for the purpose of determining the amount to be included in capital pursuant to subparagraph 190.13(a)(ii) of the Act.
As indicated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the above comments do not constitute an advance tax ruling and are not binding on the Agency. We trust the above comments will be of assistance to you. If you have any other questions, do not hesitate to contact us.
Yours truly,
Manager
Section du financement et des régimes
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. William J. Carroll
Toronto North TSO
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content