7 November 1996 External T.I. 9636805 - CICA 3860 AND LARGE CORPORATIONS TAX

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 a deficit shown as such on the balance sheet and created by the application of CICA 3860 to redeemable and retractable high-low preferred shares is deductible in computing capital under paragraph 181.2(3)(i) for Part I.3 tax purposes.

Position:

Yes, provided that the accounting treatment is in accordance with GAAP.

Reasons:

Subsection 181(3) refers to the amounts reflected on the balance sheet using GAAP. Paragraph 181.2(3)(i) specifically allows a deficit to be deducted in computing capital. (See documents #E9615465 and #E9615469)

									5-963680
XXXXXXXXXX							J. Leigh

Attention: XXXXXXXXXX

November 7, 1996

Dear Sirs:

Re: CICA Handbook Section 3860 and Large Corporations Tax

This is in reply to your facsimile dated November 4, 1996 in which you requested confirmation that a deficit shown as such on the balance sheet and created by the application of section 3860 of the CICA handbook to redeemable and retractable high-low preferred shares is deductible for Part I.3 tax purposes pursuant to paragraph 181.2(3)(i) of the Income Tax Act (the "Act").

Subsection 181(3) of the Act refers to amounts reflected on a corporation's balance sheet prepared in accordance with generally accepted accounting principles ("GAAP"). The CICA handbook generally represents the accepted authority for the application of GAAP in Canada.

Handbook section 3860 requires redeemable and retractable high-low preferred shares to be presented as debt on the balance sheet. Where the carrying value of such shares is increased, our understanding is that an amount offsetting the increase is either to be disclosed in the balance sheet as a separate negative component of shareholders' equity or reflected as a direct charge to retained earnings. As we previously indicated to you in our letter dated July 17, 1996, it is our view that the separate component would not constitute a deficit that would be deductible under paragraph 181.2(3)(i) of the Act. Where the offsetting amount is charged to retained earnings, it is our view that the reduced amount of the retained earnings would be included in computing capital pursuant to paragraph 181.2(3)(a) of the Act. If the charge to retained earnings results in a deficit, such deficit would be deductible pursuant to paragraph 181.2(3)(i) of the Act.

While we trust that our comments are of assistance to you, they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of a particular situation.

Yours truly,

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