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 an amount identified in the financial statements is a loan or advance for the purpose of the investment allowance under subsection 181.2(4).
Position: Factual determination.
Reasons: Legal meaning of loan or advance.
XXXXXXXXXX 2002-016225
K. Cooper
November 26, 2002
Dear XXXXXXXXXX:
Re. Part I.3 Investment Allowance
This is in reply to your letter of August 28, 2002 wherein you requested our views as to whether an asset reflected on the financial statements of a corporation qualifies for an investment allowance under Part I.3 of the Income Tax Act (hereinafter the "Act").
The particular situation outlined in your letter appears to be a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Since your situation seems to involve a specific taxpayer and completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.
The investment allowance reduces the capital of a corporation in determining the corporation's taxable capital upon which Part I.3 tax must be paid. The computation of the investment allowance for non-financial institutions is found in subsection 181.2(4) of the Act, which provides a listing of the items for which an investment allowance may be claimed. This list includes in paragraph 181.2(4)(b) of the Act a loan or advance to another corporation (other than a financial institution). The courts have considered the meanings of the terms used in paragraph 181.2(4)(b) of the Act and have looked to the legal meaning of these terms in assessing whether any particular balance sheet item was included within the paragraph.
In order for there to be a loan at law it is necessary that there be a delivery of the subject of the loan by the lender to the borrower and that there be an obligation on behalf of the borrower to return the subject matter of the loan. For example, where funds have simply been set aside by the corporation and held on deposit by the recipient, it is unlikely that there has been an actual transfer of the funds from the corporation to the recipient by way of a loan where the funds are not available to the recipient for its own use. According to the jurisprudence, most recently Federated Co-Operatives Limited v. H.M.Q, 2001 DTC 5414 (F.C.A.), the determination of whether the funds have been advanced to the recipient depends upon whether the funds represent a payment made by the corporation in return for the agreement of the recipient to provide goods or services in the future. In Oerlikon Aérospatiale Inc. v. H.M.Q., 99 DTC 5318 (F.C.A.), the Court stated that "[t]he effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it."
An arrangement whereby funds are transferred to another corporation which are to be effectively held in trust for the transferor does not appear to have the nature of either a loan or an advance for the purposes of the investment allowance under paragraph 181.2(4)(b) of the Act. Further, if the recipient is a financial institution within the meaning of the definition in subsection 181(1) of the Act, even if it could be argued that the transfer of funds represented a loan or advance it would not be eligible on the basis of the exception in paragraph 181.2(4)(b).
We hope that our comments will be of assistance.
Yours truly,
F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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