6 September 1990 External T.I. 9009895 F - Asset Write Downs

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.

September 6, 1990

Dear Sirs:

This is in reply to your letter of May 28, 1990 with respect to asset write downs and the proposed Part I.3 Tax on Large Corporations.

In certain situations, taxpayers may reduce the carrying cost of certain assets on their balance sheet in accordance with generally accepted accounting principles. The write downs would be expensed for accounting purposes and the asset reduced accordingly.

In a situation where the write down reduces retained earnings for accounting purposes but is not deductible for tax purposes, we agree with your view that the write down would be a reserve as defined in proposed subsection 181(1) of the Income Tax Act (the "Act") and accordingly would be included in taxable capital pursuant to paragraph 181.2(3)(b) of the Act.

An investment allowance is allowed based on the carrying value a of certain assets on the balance sheet pursuant to proposed subsection 181.2(4) of the Act. There is no provision in this subsection 181.2(4) of the Act. There is no provision in this subsection to increase the carrying value of an asset by the amount of the initial write down where such a write down is viewed as a reserve. Accordingly, we agree with your view that there is no adjustment to the carrying value of the asset written down on the balance sheet for purposes of proposed subsection 181.2(4).

Your view with respect to this being an anomalous result would more appropriately be addressed to the Department of Finance for their consideration.

We would advise that the opinions expressed above are based upon the amendments to the Income Tax Act proposed in Bill C-28 as passed by the House of Commons on December 20, 1989 and those published by the Department of Finance in July, 1990. Further, while we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and are therefore not binding upon the department in respect of a particular situation.

Yours truly,

for Director Financial Industries Division Rulings Directorate