Principal Issues: Following a non-arm's length transfer of assets, a corporation's books reflected the transferred assets at fair market value. The share capital reported on the consolidated balance sheet presented to the shareholders reflected the transferred assets at fair market value. The share capital reported on the unconsolidated balance sheet prepared for Part I.3 tax purposes reported a lesser amount in share capital as if the transferred assets were carried at the rollover transfer amount rather than fair market value. Can the unconsolidated balance sheet prepared using different accounting principles than those used in preparing the consolidated financial statements presented to the shareholders be used for purposes of Part I.3?
Position: It depends upon whether the accounting presentation for that transaction as reflected in the consolidated statements was in accordance with GAAP. If it was, the same accounting principles must be employed in establishing the unconsolidated balances for Part I.3 purposes. If it was not, a presentation for the transaction that is in accordance with GAAP must be employed in preparing the unconsolidated financial statements.
Reasons: Subsection 181(3) of the Act requires that amounts reflected in the unconsolidated balance sheet prepared in accordance with GAAP and presented to the shareholders shall be used for Part I.3 purposes. Where no such balance sheet exists, the balances that would have been reflected in such a balance sheet shall be used. Where only a consolidated balance sheet has been prepared and presented to the shareholders, the unconsolidated balance sheet prepared for tax purposes shall incorporate only those changes necessary to satisfy the criteria of subsection 181(3). Hence, if the consolidated statements were prepared in accordance with GAAP, the only acceptable changes would be to remove the effects of consolidation.