31 July 1995 External T.I. 9518505 - PUSH-DOWN ACCOUNTING & 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:

Whether the balance sheet amounts as adjusted by the application of "push-down accounting", as sanctioned by CICA section 1625, are to be used to determine Part I.3 tax liability.

Position TAKEN:

Yes. The amounts reflected in the balance sheet of a corporation, adjusted by "push-down accounting" in accordance with generally accepted accounting principles, are to be used to determine the components necessary to the computation of Part I.3 tax.

Reasons FOR POSITION TAKEN:

Subsection 181(3) requires the use of a GAAP-prepared balance sheet. The values attributed to the assets, liabilities and equity of that balance sheet are used to determine the various components, such as investment allowance, capital and taxable capital, necessary to the computation of Part I.3 tax.

                    	            				951850
XXXXXXXXXX                     	G. Donell

Attention: XXXXXXXXXX

July 31, 1995

Dear Sir:

Re: Large Corporation Tax & "Push-down accounting"

This is in reply to your letter of July 14, 1995 in which you have asked us whether balance sheet values adjusted by the application of "push-down accounting" ("PDA") are relevant to the determination of large corporation tax under Part I.3 of the Income Tax Act (the "Act").

Subsection 181(3) of the Act requires that amounts reflected in a corporation's balance sheet in accordance with generally accepted accounting principles ("GAAP"), be used to determine the values of the various components of Part I.3 tax. The CICA Handbook, which generally represents the accepted authority for the application of GAAP in Canada, in section 1625 discusses the conditions under which the application of PDA is recommended.

It is our understanding that PDA is a method, independent of consolidation, applicable in specific circumstances, whereby assets and liabilities of an acquired or reorganized corporation ("the corporation") may be restated to reflect the costs of an acquiring entity. The adjustments effectively result in the writing up or down to fair market value ("FMV") of the assets and liabilities of the corporation within the constraints of the costs of the acquiring entity. Contributed surplus is generally credited with the balancing or offsetting entry. Contributed surplus is a component of taxable capital by virtue of paragraph 181.2(3)(a) of the Act and, accordingly, any change resulting from the application of PDA is reflected on a dollar for dollar basis in the large corporation tax base.

In conclusion it is our view that amounts reflected in the unconsolidated balance sheet of a corporation, adjusted by PDA in accordance with generally accepted accounting principles, are to be used to determine the components necessary to the computation of Part I.3 tax pursuant to subsection 181(3) of the Act.

We trust that the above comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy & Legislation Branch