11 May 1993 Internal T.I. 9311817 F - Large Corporation Tax - Take or Pay Amount

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.

May 11, 1993

Attention:  Gary Bessette

Take-or-Pay Amounts Part I.3 Tax on Large Corporation

Further to our memorandum of March 6, 1992, this is in reply to your memorandum of April 20, 1993 wherein you have requested our opinion on the subject matter in light of the decision of the Court of Appeal for Ontario on December 4, 1992 in the case of TransCanada Pipelines Limited (court file #114/90). Thank you for sending us a copy of the Court decision.

Background

Under long-term supply contracts with gas producers, a purchaser agreed to purchase certain minimum quantities of gas each year. If, in any year, it was unable to take delivery of the agreed minimum, it was nevertheless required to pay the producer the full minimum purchase price, and it correspondingly became entitled to credit for such payments against future purchases of gas, within a limited period of time, provided that it otherwise complied with its minimum contract obligations. The price to be paid for such future purchases of gas would be the price in effect at the time of delivery less the amount of any prior take-or-pay payments. The Court concluded in the case of TransCanada Pipelines Limited that the take-or-pay payments were "investments" and "advances" within the meaning of paragraph 54(1)(c) of the Corporations Tax Act (Ontario) in respect of Ontario capital tax and commented as follows:

... the character of the take-or-pay payments ... fell within dictionary definitions of "advance" as a "payment made beforehand or in anticipation" and a "payment made before... the completion of an obligation for which it is to be paid" (Dictionary of Business and Finance (1957), p.9).

Our Comments:

By virtue of the broad scope of the definition of the term "reserve" under subsection 181(1) of the Income Tax Act (the "Act"), it is arguable that a take-or-pay payment would be a reserve for the purpose of paragraph 181.2(3)(b) of the Act. But, it does not preclude the amount of such payment 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" (by analogy, see the cases of McDougall v. Galbraith (No. 2) (1913), 11 D.L.R. 133 (C.A.) and Foster v. M.N.R., 71 DTC 5207 (Ex. Ct.)). Accordingly, it is our view that a take-or-pay payment is an "advance" for the purpose of paragraph 181.2(3)(c) of the Act. (See also the Department's response to the question #9 at the roundtable session in the 1992 Canadian Petroleum Tax Society Conference.) The decision of the Court of Appeal for Ontario in the case of TransCanada Pipelines Limited further supports the Department's position in respect of the subject matter.

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings Directorate