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:
Where an automobile dealership acquires inventory from an automobile manufacturer by way of a wholesale conditional sales contract, does the obligation constitute a loan or an advance under paragraph 181.2(3)(c), a note or similar obligation under paragraph 181.2(3)(d) or other indebtedness under paragraph 181.2(3)(f).
Position:
This is a question of fact which can only be determined after a review of the terms of the wholesale conditional sales contract. However, based on the information provided, it appears that paragraph 181.2(3)(c) or (d) would be applicable rather than paragraph 181.2(3)(f) given that the obligation under the contract is more than just an ordinary trade payable.
Reasons:
See previous opinion #923553.
5-962185
XXXXXXXXXX J. Leigh
Attention: XXXXXXXXXX
September 9, 1996
Dear Sirs:
Re: Large Corporations Tax and Automobile Dealerships
This is in reply to your letter of June 14, 1996 in which you requested our views on whether amounts related to floorplan financing of vehicle inventories constitute loans or advances as contemplated by paragraph 181.2(3)(c) of the Income Tax Act (the "Act") or other indebtedness that is not included in capital unless it is outstanding for more than 365 days pursuant to paragraph 181.2(3)(f) of the Act.
The situation described in your letter appears to relate to an actual fact situation. To the extent that you require assistance in determining the tax treatment with regard to a completed transaction, you should contact your district tax services office. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling. However, we can provide you with the following general comments which are not binding on the Department.
In your letter, you describe a situation where an automobile dealership acquires inventories of vehicles from a manufacturer by way of a wholesale conditional sales contract. Pursuant to the contract, the manufacturer retains legal title to the inventory until the vehicle is sold to a third party and the total wholesale price and any other amounts payable are paid in full. The wholesale conditional sales contract is treated for accounting purposes as an acquisition of inventory by the dealership and a disposition of inventory by the manufacturer. On this basis, it is your view that the obligation of the dealership to the manufacturer should be considered a trade payable rather than a loan or an advance. Accordingly, you believe that floorplan financing of this nature should be excluded from the calculation of capital for Part I.3 tax purposes.
Where an amount is borrowed for the purpose of acquiring inventory, it does not necessarily mean that the amount is only included in computing capital to the extent that it falls within paragraph 181.2(3)(f) of the Act. We would note that there is no requirement in paragraph 181.2(3)(c) or (d) of the Act that the borrowing referred to therein relate to the acquisition of certain types of assets or be outstanding for a prescribed time period.
The determination of whether the obligation of the dealer to the manufacturer pursuant to the wholesale conditional sales contract is to be included in the computation of capital under subsection 181.2(3) of the Act can only be made after a review of all the relevant facts, including the terms of the wholesale conditional sales contract. Depending on the circumstances, the obligation may be included in computing capital as:
-a loan or an advance under paragraph 181.2(3)(c) of the Act,
-an indebtedness represented by bonds, debentures, notes, mortgages, bankers' acceptances or similar obligations under paragraph 181.2(3)(d) of the Act, or
-other indebtedness (other than any indebtedness in respect of a lease) that has been outstanding for more than 365 days under paragraph 181.2(3)(f) of the Act.
Based on the information provided in your letter, it appears to us that the nature of the obligation pursuant to the wholesale conditional sales contract is distinguishable from an ordinary trade payable in that the obligation is secured by the dealership's automobile inventory and the dealership is obligated to pay the manufacturer interest calculated on the wholesale price until the date of full payout of the contract. In our view, it would be necessary to determine whether the obligation would constitute a loan, an advance or a note. These terms are defined in Black's Law Dictionary as follows:
Loan. A lending. Delivery by one part to and receipt by another part of sum of money upon agreement, express or implied, to repay it with or without interest...Anything furnished for temporary use to a person at his request, on condition that it shall be returned, or its equivalent in kind, with or without compensation for its use....
Advance. To pay money or render other value before it is due;...to loan;...To supply beforehand;...furnishing money or goods for others in expectation of reimbursement; money or commodities furnished on credit. A loan, or gift or money advanced to be repaid conditionally....
Note. An instrument containing an express and absolute promise of signer (i.e., maker) to pay to a specified person or order, or bearer, a definite sum of money at a specified time.
While, as indicated above, this is a factual determination, it would appear that the obligation has characteristics which, to some extent, meet each of the above definitions. If it is determined that either paragraph 181.2(3)(c) or (d) of the Act has application, paragraph 181.2(3)(f) of the Act would not apply since it only applies to "other indebtedness" that has been owing for over 365 days before the end of the year.
The above comments are equally applicable where the manufacturer assigns the wholesale conditional sales contract to a financial operation affiliated with the manufacturer as the obligation exists regardless of whether the amount is payable to the manufacturer or the financial operation.
We hope that our comments are of assistance to you.
Yours truly,
Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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, 1996
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, 1996
Email this Content