3 June 1994 External T.I. 9406995 - USE OF DIFFERENT ACCOUNTING POLICIES UNDER PART I.3

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.

Principal Issues:

1.For purposes of Part I.3, is a corporation entitled to change from one accounting policy to another, where both policies are in accordance with GAAP?

2.Where consolidated financial statements are prepared for shareholder presentation, is a corporation permitted to use a different accounting policy (acceptable under GAAP) in financial statements prepared for purposes of Part I.3?

Position TAKEN:

1.Yes, if the change is permitted under GAAP and is then followed consistently.

2.No.

Reasons FOR POSITION TAKEN:

1.Part I.3 is GAAP oriented per 181(3) and GAAP permits a change in accounting policy in some circumstances.

2.Where the consolidated statements are in accordance with GAAP, 181(3)(a) and (b) only require the elimination of the consolidation aspects.

			940699

XXXXXXXXXX B.G. Dodd

Attention: XXXXXXXXXX

June 3, 1994

Dear Sirs:

Re: Large Corporations Tax

We are writing in reply to your letter dated March 8, 1994 concerning Part I.3 of the Income Tax Act S.C. 1970-71-72, c. 63 as amended consolidated to June 10, 1993 (the "Act"), and particularly paragraph 181(3)(b) thereof.

Subsection 181(3) of the Act provides, in part, that in determining carrying values and other amounts under Part I.3

(a)the consolidation method of accounting shall not be used, and

(b)subject to (a) above, the amounts reflected in the balance sheet presented to the shareholders of the corporation are to be used, or where such balance sheet was not prepared in accordance with generally accepted accounting principles ("GAAP") or no such balance sheet was prepared, the amounts to be used are those that would be reflected if such a balance sheet had been prepared in accordance with GAAP.

Given these rules, you enquire as follows:

-where there are alternative methods of accounting, each of which is acceptable under GAAP, whether a corporation entitled to change from one method to the other; and

-whether a corporation may use one of the acceptable methods of accounting in its consolidated financial statements which are presented to its shareholders at the annual meeting and an alternative acceptable method in its corporate and internal financial statements which are used for tax purposes.

It is our understanding that GAAP in Canada are generally as represented in the Canadian Institute of Chartered Accountants Handbook (the "Handbook").

Insofar as your first question is concerned, we note that in accordance with section 1506 of the Handbook, "There is a general presumption that the accounting policies followed by an enterprise are consistent within each accounting period and from one period to the next". The Handbook also allows that a change in accounting policy may be made in certain limited circumstances. It would be our general view that a change from one acceptable accounting policy to another, made in accordance with the Handbook, and followed consistently thereafter, would be acceptable for purposes Part I.3 of the Act provided such new method is used in the preparation of the financial statements that are presented to the shareholders. (This may or may not be applicable insofar as Part I of the Act is concerned. In West Kootenay Power and Light Company Limited v. the Queen, 92 DTC 6023, the Federal Court of Appeal confirmed that income for income tax purposes must be computed in accordance with a method that produces the "truer picture".)

With respect to your second question, you note that corporations with subsidiaries generally present consolidated financial statements to their shareholders at their annual meetings and not their separate corporate accounts. You suggest that because a balance sheet prepared on a consolidated basis cannot be used for Part I.3 purposes, "there is no such balance sheet that is presented to the shareholders", and that the corporation must therefore prepare a GAAP-based balance sheet and in so doing, it is open to the corporation to use a different method of accounting from that used in the consolidated statements, provided such method is acceptable under GAAP.

We note that, pursuant to section 1600.02 of the Handbook:

"Consolidated financial statements are those produced by aggregating the financial statements of one or more subsidiary companies on a line-by-line basis (i.e., by adding together corresponding items of assets, liabilities, revenues and expenses) with the financial statements of the parent company, eliminating intercompany balances and transactions ..."

Assuming consolidated financial statements which have been presented to the shareholders and which have been prepared in accordance with GAAP, it is our view that the interaction of paragraphs 181(3)(a) and (b) is such that in determining carrying values and other amounts for purposes of Part I.3, the consolidated statements are relevant except to the extent of the consolidation accounting reflected therein. In other words, it is our view that with respect to any particular corporation in the group, subsection 181(3) merely requires the elimination of the consolidation aspects of the financial statements - it does not otherwise contemplate restating of the financial statements.

In view of this, we are of the opinion that subsection 181(3) of the Act does not permit the development, for Part I.3 purposes, of separate financial statements based on accounting policies which differ from those in the consolidated statements which were presented to the shareholders.

The foregoing is an expression of opinion only and may not necessarily be applicable in the context of a particular situation; nevertheless, we hope this will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate