1 May 1992 Income Tax Severed Letter 9133825 - Large Corporation Tax

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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: LARGE CORPORATION TAX SECTION: 181.2(3)(b)]

913382
A. Seidel
(613) 957-3496

Attention: XXX

May 1, 1992

Dear Sirs:

This is in reply to your letters dated December 5, 1991 and March 13, 1992 with respect to the inclusion of deferred gains in the computation of tax on large corporations pursuant to subsection 181.2(3) of the Income Tax Act (the "Act"). All further references to statute are references to the Act unless otherwise indicated.

In the situation where a corporation disposes of assets at fair market value to a 50% owned Canadian affiliate, you advise that generally accepted accounting principles ("GAAP") would require that the transaction be reported as a sale with one-half of the profit from the sale recorded in the income statement and one- half recorded as a deferred gain. You also advise that the deferred gain would not be recorded as part of Shareholder's Equity on the balance sheet but rather would be recorded as a separate item outside of Shareholder's Equity.

It is your view that the deferred gain does not form part of a corporations "capital", as defined in subsection 181.2(3), on the basis that it is not a surplus includable under paragraph 181.2(3)(a), that it is not a reserve includable under paragraph 181.2(3)(b) and that it is not included in any of the other provisions of subsection 181.2(3). In your March 13, 1992 letter, you indicate that the argument that deferred revenue is not a reserve, provision or allowance under GAAP is support for your view that deferred gains are not included in a corporations capital.

It is not clear from your letter as to the reason why 50% of the profit would be reported as a deferred gain for accounting purposes. We are assuming, however, that the entire gain would be included in income for tax purposes without reserve pursuant to paragraph 20(1)(n) or section 40 of the Act for example. We note that the term "reserve" is defined in subsection 181(1) of the Act as "... the amount at the end of the year of all of the corporation's reserves, provisions and allowances...". In our view this is a broad definition that extends the meaning of the term "reserve" beyond the somewhat restrictive scope of accounting reserves. We also note that an amount deducted pursuant to paragraph 20(1)(m) of the Act, for example, would be a reserve for purposes of the Act but for accounting purposes would be deferred revenue and arguably would not be a reserve for accounting purposes.

Generally it is our position that income that is deferred for accounting purposes will constitute a "reserve", within the meaning noted above, that will be required to be included in the capital of a corporation pursuant to paragraph 181.2(3)(b) of the Act except to the extent that such amount is deducted by the corporation in computing its income for the year under Part I of the Act.

Given the views expressed above, we have not considered whether the deferred gain constitutes an "other surplus" of the corporation but we are not prepared to concede at this point that it would not be.

While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate