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:
Are unfunded pension liabilities included in capital for LCT purposes as a reserve or as other indebtedness when outstanding for more than 365 days and if so, is this a policy decision or requirement of the Act?
Position:
If the liability is a legal obligation, rather than a contingent one, the amount is not a reserve. It would be included in capital (of a non-financial institution) if it remained outstanding more than 365 days.
Reasons:
The Act.
961151
XXXXXXXXXX Michael Cooke
Attention: XXXXXXXXXX
May 1, 1996
Dear Sirs:
Re: Part I.3 Tax on Large Corporations
This is in reply to your facsimile letter of March 29, 1996, wherein you requested our views on the application of Part I.3 of the Income Tax Act (the "Act") where a corporation that is not a financial institution has an unfunded pension liability outstanding for more than 365 days.
The Department's view, as expressed in our letter dated August 3, 1990 and our memorandum dated June 9, 1995 that you referred to, is that where an unfunded pension liability constitutes a legal obligation rather than a contingent obligation, the amount that is not expensed for tax purposes will not represent a reserve for the purpose of paragraph 181.2(3)(b) of the Act. You indicated that you agree with this view.
The 1995 memorandum also states that where such an amount remains outstanding for more than 365 days, it will be required to be included in the corporation's capital as other indebtedness pursuant to paragraph 181.2(3)(f) of the Act. You indicated that you agree with this view as well.
However, you expressed a concern that since the 1990 letter did not discuss the potential inclusion of an unfunded pension liability in capital under paragraph 181.2(3)(f) of the Act the 1995 memorandum represented a change in Department "policy" with respect to unfunded pension liabilities for Part I.3 purposes. Accordingly, it is your view that the policy change should only apply prospectively from the date of the 1995 memorandum.
We disagree with your view. It is paragraph 181.2(3)(f) of the Act and not Department policy that requires the amount of all other indebtedness outstanding more than 365 days before the end of the year to be included in a corporation's capital for that year. Accordingly, the inclusion of any amount of an unfunded pension liability in capital for the purpose of Part I.3 of the Act will depend on whether the unfunded amount represents a contingent or legal liability. If the unfunded amount represents a contingent liability it will be included in capital as a reserve pursuant to paragraph 181.2(3)(b) of the Act. If the amount represents a legal liability then only amounts outstanding for more than 365 days will be included as required by paragraph 181.2(3)(f) of the Act.
We can add that the 1990 letter, which was one of the first letters that we issued with respect to Part I.3, dealt with a number of specific questions including the classification of an unfunded pension liability for purposes of 181.2(3)(b) of the Act. The question of whether an unfunded pension liability would be included under paragraph 181.2(3)(f) of the Act was neither posed by the taxpayer nor addressed by the Department at that time.
We trust the foregoing comments are of assistance to you.
Yours truly,
F. Lee Workman
Section Chief
Financial Institutions Section
Income Tax Rulings and
Interpretations Directorate
Policy and Legislations Branch
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