12 June 1992 Income Tax Severed Letter 9216415 - Take-or-pay Amount - Advance - 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: TAKE-OR-PAY AMOUNT - ADVANCE - LARGE CORPORATION TAX SECTION: 181.2(3)(c), 181.2(3)(b), 181(1)]

1992 CPTS ROUNDTABLE

QUESTION

• 9. Revenue Canada appears to view a "take-or-pay" reserve as an advance for purposes of determining the amount of taxable capital under subsections 181.2(2) and (3) in the calculation of Part I.3 tax on large corporations. This seems to conflict with how a "take-or-pay" amount is generally treated in determining Part I tax, i.e. as a tax deductible reserve under paragraph 20(1)(m). The distinction between a tax deductible reserve and an advance is important because a tax deductible reserve is excluded from taxable capital by virtue of paragraph 181.2(3)(b) whereas an advance is included in taxable capital under paragraph 181.2(3)(c). What is Revenue Canada's current position and assessing policy relating to this matter?

ANSWER

• 9. Revenue Canada stated its position at the Roundtable session of the 1991 Canadian Petroleum Tax Society Conference that a take-or-pay amount received by a corporate producer is regarded as an advance to the corporation under paragraph 181.2(3)(c). This is so notwithstanding that such amount may arguably be regarded as a reserve within the meaning of the term assigned by subsection 181(1).
• Application of paragraph 181.2(3)(b) to exclude an amount of a tax deductible reserve does not preclude the amount from being included in taxable capital under paragraph 181.2(3)(c) or (f) provided that the requirements of such paragraph have been met. The term "advance" often means simply "pay" or "pay money before it is due". Accordingly, a take-or-pay amount is an advance for the purpose of paragraph 181.2(3)(c). This view is buttressed by the decision of the Ontario Supreme Court, TransCanada Pipelines Limited v. The Minister of Revenue (Ontario), (1990) O.J. No. 64, in which the term "advance" was regarded by the Court as being broad enough to include a take-or-pay amount given to a corporate producer for the purpose of calculating Ontario capital tax under the Corporation Tax Act, (Ontario).

Prepared by: Peter Lee

ISSUE SHEET

1991 CPTS Roundtable Peter Lee
Question 9 5-921641
June 12, 1992

Background

Generally, under a take-or-pay arrangement, the purchaser of a product agrees to pay to the producer a given amount within a given period irrespective of whether or not the purchaser takes delivery of all of the product contemplated in the arrangement. Any excess of amounts paid by the purchaser to the producer over that applied to actual purchases ("take-or-pay amount") is creditable against future deliveries within a stated period of time, assuming the minimum purchase requirements in the later period have been met. Where the purchaser seeks to apply the previously unapplied take-or-pay amounts against a purchase of the product and the producer cannot deliver the product, such amount is refundable to the purchaser.

Issues

Whether a take-or-pay amount could be regarded as an advance for the purpose of paragraph 181.2(3)(c), notwithstanding such amount may arguably also be regarded as a reserve within the meaning of the term assigned by subsection 181(1) for the purpose of paragraph 181.2(3)(b)?

Analysis and Positions Taken

• 1. In the 1990 Canadian Petroleum Tax Society Conference, we responded to question 25 at the Rountable session as follows:
• It is our understanding that Finance intended taxable capital as defined in ... subsection 181.2(2) of the Act to include funds available for use by a particular corporation.
• A take-or-pay amount appears to fit this criteria for inclusion as a component of capital and taxable capital. See also the memo to file dated April 2, 1990 (#0-0350) with respect to our discussion with the Department of Finance regarding a take-or-pay amount .
• 2. Generally accepted accounting principles require that a take-or-pay amount be shown as deferred revenue by a producer. But deferred revenue is generally classified as a liability and not as a reserve. (See Accounting Principles - A Canadian Viewpoint by Mr. R.M. Skinner, page 156.) Accordingly, a take-or-pay amount is not a reserve and is a liability for accounting purposes.
• 3. By virtue of the definition of the term "reserve" under subsection 181(1) to include any "reserve", "provisions" and "allowances" of a corporation (i.e. those words have broad meaning), it is arguable that a take-or-pay amount (i.e. generally a reserve under paragraph 20(1)(m) is allowed for an unapplied take-or-pay amount until such obligation of providing the product is expired) would be a reserve for the purpose of paragraph 181.2(3)(b). (See the letter to 24(1) dated May 1, 1992 (#913382).)
• 4. Notwithstanding that a take-or-pay amount may arguably be regarded as a reserve within the meaning of the term assigned by subsection 181(1) for the purpose of paragraph 181.2(3)(b) (i.e. such reserve would be excluded from taxable capital by virtue of paragraph 181.2(3)(b)), the take-or-pay amount can also be regarded as an advance for the purpose of paragraph 181.2(3)(c) or as other indebtedness (i.e. if it would not otherwise be regarded as an advance) for the purpose of paragraph 181.2(3)(f) (i.e. see 2 above). The term "advance" is not defined in the Act and accordingly must be interpreted pursuant to its ordinary meaning. The description of an advance may not necessarily be of the same kind or nature of a loan (i.e. as a loan there must be a lender/borrower relationship and a repayment at some point in time). The term "advance" does not always mean "pay out money which is to be later repaid", but often means simply "pay" or "pay money before it is due". Accordingly, a take-or-pay amount is an advance for the purpose of paragraph 181.2(3)(c). In the decision of an unreported case of Ontario Supreme Court, TransCanada Pipelines Limited v. The Minister of Revenue (Ontario), (1990) O.J. No. 64, the term "advance" was regarded by the Court as broad enough to include a take-or-pay amount given to a corporate producer for the purpose of calculating Ontario capital tax under the Corporation Tax Act, (Ontario). 24(1) and 21(1)(b) (See the letter to 24(1) dated March 4, 1991 (#5-910252) and the memorandum to Calgary District Office dated November 16, 1990 (#7-4766).)

John Chan discussed the question and answer with Mr. John Bentley at his office on June 10, 1992 and he does not have any concerns about the question and answer.

A copy of the question and answer together with the issue sheet was sent by fax to Simon Thompson, Dept. of Finance on June 9, 1992 and John Chan spoke to Mr Thompson on June 10. Mr. Thompson said that Finance does not have any concerns about the question and answer.

The question and answer was reviewed by John Kurrant, Oil & Gas Specialist on June 12 and he said that he does not have any concerns.