7 May 1995 Internal T.I. 9510220 - PART I.3, O/S CHEQUES & OVERDRAFTS

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 Part I.3 tax purposes, why the department makes a distinction between cheques that constitute a payment as opposed to those that do not.

(2)Whether an overdraft can result with respect to outstanding cheques (before presented to bank).

(3)Whether an amount billed in advance and not received by year end for services to be rendered in a subsequent year is to be included in capital under subsection 181.2(3).

Position TAKEN:

(1)The department does not make the distinction. The distinction is founded in common and civil law.

(2) Yes.

(3) Depends upon facts.

Reasons FOR POSITION TAKEN:

(1)The common law conditional payment principle deterimnes the date of payment as the date of delivery of the cheque by a debtor to his or her creditor. Under Civil law the date of payment is the date in which the cheque is honored by the bank.

(2) We consider that the writing of a cheque by a corporation which has overdraft privileges represents tacit approval and acknowledgement by the bank

(3) The advance billing would not be considered a loan or advance pursuant to paragraph 181.2(3)(c) but may depending upon the specific facts fall within one of the other paragraphs of subsection 181.2(3).

Revenue Canada Round Table
Tax Executive Institute Conference
May 7-10, 1995

Question 22

TAX ON LARGE CORPORATIONS - BANK OVERDRAFT

In the reply to question VI(2) of the May 1994 T.E.I. round table, Revenue Canada explained its position on bank overdrafts with respect to the tax on large corporations.

(a)Why did the Department make a distinction between the giving of cheques by a debtor to its creditors where a cheque operates as payment and where the giving of a cheque does not operate as a payment?

If the distinction is to segregate cheques governed under common law jurisdictions from the ones which are governed under civil law, it seems that in both jurisdictions, a debtor is not discharged until the cheque is presented for payment and is honoured. In addition, the rules pertaining to bills of exchange are regulated under federal statute and, accordingly, common and civil law distinction should not apply in that regard.

(b)Revenue Canada has taken the following position which is included in question VI(2).

"It is the view of Revenue Canada that outstanding cheques do not, in themselves, constitute an indebtedness of the corporation. However, the bank indebtedness reflected in the balance sheet resulting from outstanding cheques constitutes a loan or advance to a corporation pursuant to paragraph 181.2(3)(c) of the Act where the giving of the cheques by a debtor to its creditors operates as payment."

Some taxpayers believe that Revenue Canada's position is rebuttable for the following reasons. While a loan can be gratuitous, the normal commercial and banking practice is that any bank loan or overdraft will attract interest. If no interest is charged by a bank on an outstanding cheque at year end, it is difficult to see how it could be concluded that a bank loan, advance or overdraft exists at year end. Outstanding cheques are factually and technically neither loans nor advances because there must be an acknowledgement or an agreement to set up a loan relationship which is only evidenced when the bank acknowledges an overdraft. Accordingly, the liability to the extent that there is no overdraft is not with the bank but is with the trade creditor and paragraph 181.2(3)(f) only requires accounts payable outstanding for more than 365 days to be included in taxable capital.

Can the Department provide its comments?

Department's Position

(a)Bank overdrafts are considered to have arisen to the extent that they have been utilized or drawn upon. The writing of a cheque on a bank account will be considered to constitute a draw upon that account where that cheque represents payment.

In the common law jurisdictions a conditional payment principle has been well established. In Marreco v. Richardson , (1908) 2 KB 584, at 593 (CA) Farewell, L.J. stated,

"The giving of a cheque for a debt is payment conditional on the cheque being met, that is, subject to a condition subsequent, and if the cheque is met it is an actual payment ab initio and not a conditional one."

More recently in Moody v. MNR, 57 DTC 1050, at 1054, the Exchequer Court stated,

"In the absence of some special circumstance indicating a contrary conclusion such as, for example , post-dating or an arrangement that the cheque is not to be used for a specified time, a payment made by cheque, although conditional in some respects, is nevertheless presumably made when the cheque is delivered..."

This principle is not altered by the fact that the underlying liability between the original debtor and creditor is not generally discharged until the cheque is honoured by the respective bank nor whether the bank can charge interest on the amount of the cheque between the date of delivery and the day the cheque is presented to the bank.

The common law principle establishes the payment date as the time of delivery of the cheque. The subsequent presentation of the cheque, to the bank, will not alter, in law, the payment date unless the cheque is not honoured.

In the Civil Law jurisdiction of Quebec the courts have established the principle in a different manner. Under the Civil code the date of payment is considered to be the time in which the cheque is honoured by the bank. Delivery is irrelevant to the determination.

In Pantalons Star Laurierville Lte v. The Minister of National Revenue, 92 DTC 2182, The Tax Court of Canada examined the issue of when payment by cheque could be considered, under Civil law, to have been made. The court stated, at 2189,

"Delivery of a cheque by a debtor to its creditor does not constitute payment within the meaning of the Civil Code, other than conditional payment on the cheque being cashed by the payee."

and again at 2189,

"A bill of exchange does not in itself operate as a transfer of funds, and so delivery of a cheque cannot be considered as payment. Payment therefore did not take place until the moment when the cheque was cashed."

(b)The position taken by us in reply to question VI(2) of the May 1994 T.E.I. round table is consistent with the foregoing circumstances where the issuance of a cheque constitutes payment.

Where the cheque results in indebtedness or a negative bank balance on the balance sheet the basis for our position that such amount is a loan or advance is that the bank has, by granting the taxpayer overdraft privileges, tacitly acknowledged or agreed to the overdraft.

Author: G. Donell
File: 951022
Date: April 26, 1995