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:
Whether or not certain deferred revenue amounts are included in the capital of a corporation for purposes of Part 1.3 tax.
Position TAKEN:
Deferred revenue represented by cash is included.
Deferred revenue not represented by cash may or may not be included.
Reasons FOR POSITION TAKEN:
It is considered to be an advance and included pursuant to paragraph 181.2(3)(c).
It is a question of fact. Specific facts of a particular situation must be reviewed.
July 20, 1995
MEMORANDUM TO FILE Financial Institutions
Section
951794
PART 1.3 - TAX ON LARGE CORPORATIONS &
DEFERRED REVENUE - NON FINANCIAL INSTITUTIONS
The following sets out the Department's position for purposes of Part 1.3 tax with respect to deferred revenue recorded on the balance sheet of a corporation. Such deferred revenue may be recorded to reflect cash advances received in respect of either earned or unearned revenue, unrealized foreign exchange gains and losses, advance billings, or other accounting adjustments.
DEFERRED REVENUE REPRESENTED BY CASH
Where the deferred revenue is represented by cash we are of the view that it is an advance which is included in capital pursuant to paragraph 181.2(3)(c) of the Income Tax Act ("Act").
DEFERRED REVENUE NOT REPRESENTED BY CASH
We note that deferred revenue not represented by cash may or may not be included in the capital of a corporation either as an "other surplus" or as a "reserve" pursuant to paragraph 181.2(3)(a) or (b) of the Act respectively. This determination can only be made upon review of the particular facts of a specific situation.
We are also of the view that when dealing with unearned income which is reflected in the balance sheet as a deferred revenue account, such as income that is required to be reported in the balance sheet for regulatory purposes in advance of being earned or billed, the deferred revenue amount would not be included in the capital of the corporation. In our view as such amounts have not been earned at balance sheet date there is no basis to treat them as either "reserves" or "other surpluses".
UNREALIZED FOREIGN EXCHANGE GAINS OR LOSSES
We note that new measures were introduced in the April 1995 technical bill to deal with the issue of the unrealized foreign exchange gains or losses and Part 1.3 tax. Such gains and losses may be required to be deferred under generally accepted accounting principles. The deferred unrealized foreign exchange gains will be specifically included in the capital of the corporation pursuant to proposed paragraph 181.2(3)(b.1) of the Act and the deferred unrealized foreign exchange losses will be specifically deducted from a corporation's capital pursuant to proposed paragraph 181.2(3)(k) of the Act. An amendment to paragraph 181.2(3)(g) of the Act will provide a similar treatment of a corporation's share of any deferred unrealized foreign exchange gains and losses of a partnership of which it is a member. These proposed measures are to be applicable with respect to 1995 and subsequent taxation years.
It has been the Department's position, prior to these proposed amendments, to consider that the unrealized foreign exchange gains were included in the capital of a corporation either as "other surpluses" or as "reserves" but that there was no provision in the Act permitting an adjustment to take into account unrealized deferred foreign exchange losses for purposes of Part 1.3 tax since they do not represent a deficit deducted in computing the shareholders' equity pursuant to paragraph 181.2(3)(i) of the Act. We were of the view that a technical amendment to the Act was required to correct this anomaly and the above proposed measures will correct the anomaly with respect to the unrealized foreign exchange losses.
XXXXXXXXXX
ADVANCE BILLINGS
A corporation may bill its customers in advance of services to be rendered in the coming year and the bills may remain unpaid at year-end. The question usually raised in respect of such billings is whether or not the deferred revenue account has to be taken into account in computing the capital of a corporation. A review of the specific facts including the basis on which an amount in respect of advance billings is reflected in the balance sheet would be necessary to determine whether this amount would be included in capital by virtue of paragraph 181.2(3)(a) and/or (b) of the Act as an "other surplus" or as a "reserve". Unless it can be argued that the deferred revenue account represents earned revenue we are of the view that it would generally not be included in the capital of the corporation.
UNFUNDED PENSION LIABILITIES & UNFUNDED HEALTH & WELFARE PLANS
We refer to document 951517 for a discussion on this issue.
RATIONALE
Department's Rationale for including a deferred revenue amount in the capital of a corporation either as a "reserve" or as an "other surplus" is as follows:
The definition of "reserves" in subsection 181(1) of the Act certainly allows us to take a broad view as to what could be included therein. The broad definition of "reserves" in subsection 181(1) of the Act extends the concept of reserve beyond the accounting meaning. In our view the deferral for accounting purposes of earned income, realized amounts or amounts that have accrued but are unrealized constitutes a provision or allowance that is required to be included in the capital of a corporation except to the extent such reserves were deducted in computing its income under Part I.
We are also of the view that a reasonable argument can be made that such amounts could be included in the capital of a corporation as "other surpluses" pursuant to paragraph 181.2(3)(a) of the Act. Where the deferred revenue amount represents earned revenue, realized amounts or amounts that have accrued but are unrealized we are of the view that it may constitute an "other surplus" referred to in that paragraph. The basis for this position is generally that the deferred revenue or gains even if unrealized represent part of the capital and assets of the corporation at balance sheet date and as such constitute "other surpluses" of the corporation.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995