16 May 1994 TEI Roundtable, 9410460 - PART I.3 TAX - DEFERRED REVENUE

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:

Large Corporation Tax - Deferred revenues/charges

Position TAKEN:

Deferred revenues are considered as advances for paragraph 181.2(3)(c). Deferred charges where paid before due and to corporations who are not financial institutions are considered as advances for purposes of paragraph 181.2(4)(b) as an investment allowance.

Reasons FOR POSITION TAKEN:

Legislation and previous positions.

Revenue Canada Round Table
TEI Conference
May 16, 1994

Question VI - 4

PART I.3 TAX - DEFERRED REVENUE (LCT)

In a July, 1991 technical interpretation, the Financial Industries Division was of the view that deferred revenues of a corporation constitute a loan or advance to the corporation which must be included in the capital of the corporation under paragraph 181.2(3)(c).

(A)Does this extend to the following two scenarios:

(i) A corporation with deferred revenues on its financial statements for which it claims a reserve by virtue of paragraphs 20(1)(m), 20(1)(m.1), 20(1)(m.2) or 20(1)(n), and

(ii) A corporation with deferred revenues on its financial statements for which no reserve is claimed?

(B) If the deferred revenue recorded by one corporation is accounted for as a deferred charge by the other corporation, would the deferred charge be considered an advance for purposes of the investment allowance under paragraph 181.2(4)(b)?

Department's Position

As indicated in Part B, of Question XII of the 1993 T.E.I. conference the Department considers that deferred revenues constitute an advance for purposes of paragraph 181.2(3)(c) and accordingly this amount must be included in the computation of capital for Part I.3 tax. The availability of tax deductible reserves, whether deducted or not, will not affect the amount to be reported at paragraph 181.2(3)(c), therefore the total amount of deferred revenues to be reported in that paragraph will be identical for each of the two scenarios presented in Part A of your question.

It is also arguable that deferred revenues constitute "reserves" within the broad meaning given that term in subsection 181(1) and as such would be included in paragraph 181.2(3)(b) to the extent that tax deductible reserves are not deducted with respect to them. Where a capital inclusion occurs under both paragraphs 181.2(3)(b) and (c) with respect to the same deferred revenues subsection 181(4) will operate to exclude the amount that is double-counted.

Generally where an amount of expense is paid before it is due by one corporation to another corporation that is not a "financial institution", within the meaning given that term in subsection 181(1), and reported on the annual financial statements as a deferred charge it will be considered to be an advance, pursuant to paragraph 181.2(4)(b), for purposes of calculating an investment allowance.