17 January 2006 External T.I. 2005-0159721E5 - LCT and Government Assistance

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.

Principal Issues: 1. Would government assistance that is deferred and amortized into income in accordance with GAAP be considered a "reserve", "provision", "allowance" or "advance" for purposes of computing capital under subsection 181.2(3) of the Act?

2. Does the fact that the government assistance may become repayable at a future date if the recipient does not use the asset acquired with the funds in a manner required by the assistance agreement, result in the assistance being considered an "advance".

Position: 1. Generally no.

2. Generally no.

Reasons: 1. While each case would need be considered based on the terms and conditions of the specific assistance agreement, it is our general view that the deferred assistance balance would not be a "reserve", "provision" or "allowance" as those terms are defined for accounting purposes, nor would it constitute a legal advance provided the assistance funds were received when due under the terms and conditions of the assistance agreement.

2. The fact that the funds may become repayable at a future time because the recipient failed to continue to satisfy a requirement under the agreement would not in our view cause the funds, when received, to be considered an advance. In the event the funds do become repayable at a future time, the recipient will have a debt obligation that may or may not be included in capital.

XXXXXXXXXX 								2005-015972

January 17, 2006

Re: Part I.3 Tax - Government Assistance (Your ref. #: 6558)

We are writing in response to your letter of November 9, 2005, in which you requested our views on the treatment, for purposes of taxation under Part I.3 of the Income Tax Act (the "Act"), of "government assistance" which is reported on the financial statements of a corporate taxpayer for GAAP purposes as a "deferred credit. It is our understanding that the amount is recorded in the financial statements as a "deferred credit" because it has been received by the corporation, but will be amortized into the taxpayer's income at the same rate that the corporation is depreciating the related asset.

You asked that we confirm that the "deferred credit" reported on the balance sheet would not be a "reserve", "provision", "allowance" or "surplus", for the purposes of paragraphs 181.2(3)(a) and (b) of the Act. Court decisions in recent years have confirmed that for the purposes of Part I.3 tax, terms such as "loan" and "advance" should be interpreted based on their legal meanings, whereas terms such as "reserve", "provision", "allowance" and "surplus" should be interpreted based on their accounting meanings. Based on our understanding of the meaning of "reserve", "provision", "allowance" and "surplus" for accounting purposes, it is our general view that a "deferred credit", which is reported on the financial statements in accordance with paragraph 3800.26(b) of the CICA Handbook, would not be considered a "reserve", "provision", "allowance" or "surplus" for the purposes of Part I.3 taxation.

You have also asked that we confirm whether such a "deferred credit" would be considered an "advance" for purposes of paragraph 181.2(3)(c) of the Act, where the amount relates to assistance for the construction of an asset, and the government reimburses the corporation for actual eligible expenditures incurred based on proof of payment, and subject to a 10% holdback. It is our view, that amounts received by the corporation as reimbursement for actual expenditures incurred based on proof of payment, or received as a lump-sum at the time provided for under the terms of the assistance agreement, would not generally constitute an "advance" for purposes of paragraph 181.2(3)(c) of the Act.

Finally, you asked whether the "deferred credit" would be considered an "advance" for the purposes of Part I.3 of the Act, if the terms of the government assistance required that the recipient corporation either operate the asset constructed with the government assistance for a stipulated period of time or repay the contribution. As stated above, it is our general view that no "advance" would exist at the time that the funds are received provided the funds are not received prior to the time that they are due to be received under the terms of the assistance agreement. However, if at a later time the funds previously received become repayable, due to the occurrence of a subsequent event, the corporation may have a debt that could be included in the computation of capital for purposes of Part I.3 of the Act. The particular terms of the assistance agreement that provide for the repayment would need to be considered to determine whether the character of the deferred credit at that subsequent time would constitute a "loan or advance" or some other form of indebtedness of the corporation for purposes of Part I.3 of the Act.

While our comments are not binding on the CRA with respect to any particular fact situation, we do hope that our general comments are of assistance to you.

Yours truly,

F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Income Tax Rulings Directorate
Policy & Planning Branch