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:
What is the carrying value of real estate?
Position:
It is gross of encumbrances.
Reasons:
Supporting schedules are an integral part of the financial statements.
April 29, 1997
MEMORANDUM TO FILE Michèle Trotier
(613) 957-3494
971054
Subsection 181(3) of the Income Tax Act ("Act")
BACKGROUND
Subsection 181(3) of the Act refers to the amounts "reflected" in the balance sheet. A corporation other than a financial institution computes its Part 1.3 tax pursuant to subparagraph 181(3)(b)(i). This subparagraph refers to the amount "reflected" in the balance sheet which is presented to the shareholders of the corporation and which is prepared in accordance with generally accepted accounting principles. When dealing with a life insurance corporation, for example, (regulated by the Office of the Superintendent of Financial Institutions ("OSFI")), subparagraph 181(3)(b)(ii) of the Act refers to the amount "reflected" in the balance sheet which has been accepted by OSFI.
The comments made in Section 1500 of the CICA Handbook are helpful in establishing that supporting schedules to which the financial statements are cross-referenced are an integral part of the financial statements.
Paragraph 1500.03 of the CICA Handbook states that:
"...Notes to financial statements, and supporting schedules to which the financial statements are cross-referenced, are an integral part of such statements;..."
Paragraph 1500.04 of the CICA Handbook also states that:
"Notes to financial statements, and supporting schedules to which the financial statements are cross-referenced, are useful for the purpose of clarification or further explanation of the items in the financial statements. They have the same significance as if the information or explanations were set forth in the body of the statements themselves..."
The annual return (OSFI-54 for a life insurer) which must be filed with OSFI by the life insurer contains among other things a non-consolidated balance sheet and supporting schedules which are an integral part of the balance sheet. The cross-referenced page of the supporting schedule is indicated in the balance sheet beside the particular item which it is supporting.
ISSUES
Where a life insurance corporation owns real estate, what is the carrying value of the real estate for purposes of Part 1.3 tax? Would it be the amount shown in the balance sheet, that is net of related encumbrances or the carrying value that is gross of the encumbrances?
To determine the amounts "reflected" in the balance sheet of the life insurance corporation do we then have authority to look to the supporting schedules?
ANALYSIS
Where real estate was shown in the balance sheet net of any mortgages or other related encumbrances, the insurers were of the view that only the net amount would be taken into account as the carrying value of the real estate for purposes of Part 1.3 tax. The consequence of such a position was that for purposes of paragraph 181.3(1)(a) of the Act the carrying value of the tangible property (real estate) was considered, by the insurer, to be the net amount and if the related mortgage or encumbrance was a long term debt the insurer was not including any amount with respect to the mortgage or encumbrance for purposes of computing its taxable capital in section 181.3 of the Act. It is our understanding that OSFI currently requires that the carrying value of real estate be identified separately in the balance sheet gross of any encumbrances.
Even though the net value was shown on the balance sheet in the annual return of the insurer, Revenue Canada was of the view that one could look to the supporting schedules to the balance sheet which are filed with OSFI to determine the carrying value of the real estate as being gross of the encumbrances since the supporting schedules are an integral part of the balance sheet.
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Accordingly it is our opinion that we should be able to look to the supporting schedules, referred to above, which are an integral part of the balance sheet to determine the "carrying value" of the real estate being gross of the encumbrances.
We note that for purposes of computing the investment allowance pursuant to subsections 181.2(4) and 181.3(4) of the Act to determine the securities which may be eligible to the investment allowance one must be able to look to supporting schedules or other documents which may not even be cross-referenced to the balance sheet.
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