10 December 1996 TEI Roundtable Q. 8, 9638920 - OUTSTANDING CHEQUES & GROCERY PEOPLES CASE

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 adverse decision in the Tax Court of Canada case of "Grocery People Ltd. v. MNR" (95-686(IT)(I)) changes the Part I.3 position on outstanding cheques.

Position TAKEN:

No.

Reasons FOR POSITION TAKEN:

The legal basis for our position, outlined in the 1994 and 1995 TEI (E9410400 and E9510220), was not presented and accordingly not considered by the court in arriving at the decision. The issue was decided strictly upon an argument that indebtedness had not in fact been created by the mere existence of an outstanding cheque. The case was not appealed on this basis. The department will await a subsequent challenge before reconsideration of this position. SEE ALSO E9614387.

Revenue Canada Round Table
Tax Executive Institute Conference
December 10, 1996

Question 8

LARGE CORPORATION TAX - OUTSTANDING CHEQUES

At the May 1995 TEI Annual Conference in Hull, Revenue Canada commented that outstanding cheques must be included in determining the amount of a corporation's bank overdraft for purposes of computing the tax on large corporations under Part I.3 of the Act. In October 1995, under the informal procedure, the Tax Court of Canada in The Grocery People Ltd. v. The Minister of National Revenue (95-686(IT)(I)) commented as follows:

"I'm prepared on the basis that no liability exists between the bank and its customer, the taxpayer in this case, until such time as the bank accepts the cheque for payment and allows the account to go into overdraft - the mere presentation of a cheque by the taxpayer to its creditor does not create a bank indebtedness and using the plain meaning of the words "loans and advances," there is no loan or advance until the bank says there is and the bank has not done so in this case."

Will the court's comments affect Revenue Canada's position that outstanding cheques be included as a bank overdraft liability in computing Part I.3 tax?

Department's Position

Our position, detailed in each of the 1994 and 1995 TEI round tables, is that if a payment by cheque results in indebtedness or a negative bank balance that such resultant amount would be considered as a loan or advance to be included in capital of a corporation pursuant to paragraph 181.2(3)(c) of the Act to the extent the amount is reflected on the balance sheet of the corporation. The amounts of the cheques themselves are not necessarily included in capital only the resultant overdraft that would have arisen had the cheques been honoured on the day they were delivered; the day that payment was considered to have been made.

The common law jurisprudence clearly states that the delivery of a cheque constitutes payment at the time of delivery albeit conditional on the cheque being met. The fact that the payment is conditional and subject to a condition subsequent (the honouring of the cheque by the bank) does not alter the legal date of payment (the date of delivery) unless the cheque is not honoured. It is also our view that by granting overdraft privileges the bank has removed the condition subsequent. This and other such legal issues were not presented and considered by the court in reaching its decision, accordingly it is our view that our position remains unchanged until a subsequent challenge where the court will have the opportunity to fully consider the legal arguments that support the position we have taken.

Author: G. Donell
File: 963892
Date: November 27, 1996