23 October 1990 Internal T.I. 9005827 F - Bank Balances and Outstanding Cheques

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.

SUBJECT:  Bank Balances and Outstanding Cheques

This is in reply to your memorandum dated April 10, 1990 concerning the above issues. You had requested our comments on a potential problem occurring when the accounting bank account balance of a resident multinational life insurer is negative and this balance is caused by outstanding cheques.

We considered the situation where a resident multinational life insurer in the course of carrying on its insurance business acquires large amounts of various bonds. At the time of purchase it would normally hand over a cheque to the broker to cover the purchase price. However, it is also possible that this cheque may be in the mail or at the purchaser's premises at the end of a taxation year.

In calculating the "Canadian Investment Fund as at the end of a taxation year" ("CIF") in respect of the insurer pursuant to subsection 2405(3) of the Income Tax Regulations ("Regulations"), the valuation, within the meaning of that term in subsection 2405(3) of the Regulations, of the accounting bank account balance and the bonds must be taken into account. The first concern you addressed is whether or not the book value of the bonds is reduced by an amount under paragraph (h) of the definition of "valuation" ("paragraph (h)") in subsection 2405(3) of the Regulations. This reduction refers to "any debt incurred or assumed by the owner to acquire that particular property and that was owing by the owner at that time". It has been suggested that notwithstanding the fact that the insurer provides the broker with a cheque in payment of the purchase price of the bond if such cheque is outstanding at the end of the taxation year it will constitute a debt that was incurred by the insurer to acquire the particular property.

23

23

Consequently, in the circumstances described above, we are of the view that the insurer could not reduce the book value of the bonds by an amount in respect of any cheques outstanding at the end of the year, under paragraph (h).

Your second point is with respect to the issue discussed in our January 17, 1989 memorandum concerning whether the insurer may be able to deduct, as general borrowing, the negative balance in the accounting bank account balance which was caused by the outstanding cheques.

We are still of the view that outstanding cheques do not represent a debt referred to in clause (a)(i)(B) of the definition of CIF. As we indicated in our January 17, 1989 memorandum whether or not the negative balance resulting from outstanding cheques is a debt is a question of fact which can only be determined after reviewing a particular situation.

23      21(1)(b)

In the example you provided us with, the bank account had a negative balance of $10 million for accounting purposes which was caused by outstanding cheques of $30 million. The $10 million may be viewed as a debt referred to in clause (a)(i)(B) of the definition of CIF provided the taxpayer had overdraft privileges or was drawing on a line of credit with the bank. The $30 million would not, however, constitute a debt for purposes of paragraph (h).

As you are aware the CIF has recently been amended. Outstanding cheques are excluded from subclause (D)(i) and specifically included in subclause (D)(ii) of the new definition of CIF.

We trust that the above comments will be of assistance.

ChiefFinancial Institutions SectionFinancial Industries DivisionRulings Directorate