5 July 2002 Internal T.I. 2002-0149177 - LCT-MEANING OF RESERVES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Meaning of various terms for Part I.3 purposes.

Position:

Where a term in Part I.3 derives its meaning primarily from accounting, the accounting meaning will prevail (reserves, provisions, allowances, other surpluses, retained earnings and deferred tax). Regarding other items such as loans, advances, debentures and leases we will continue to look to the legal meaning of these terms to determine if an amount should be included.

Reasons: Jurisprudence

July 5, 2002

Technical Applications and Valuations Division			Income Tax Rulings and
Corporate Section						Interpretations Directorate
Manager							K. Cooper, LL. B.
									957-8984
Attention: Anne Wilson
									2002-014917

Part I.3 - Meaning of "Reserves"

I am writing further to our conversation and various e-mails with respect to the above-noted issue.

Our view continues to be that subsection 181(3) of the Income Tax Act provides that GAAP financial statements and the balance sheet accepted by OSFI are used only for the purpose of determining the amounts and carrying value of a corporation's assets for the purpose of calculating capital tax. The nature of an amount and whether it is to be included in the corporation's capital tax base is to be determined on the basis of what the amount legally represents.

However, as a result of recent cases (the decisions in Manulife, Royal Trust and Autobus Thomas and CCRA's decision not to continue the appeals of the Tax Court of Canada's decisions in London Life and PCL), we are prepared to concede that where a term in Part I.3 derives its meaning primarily from accounting, the accounting meaning will prevail. This will be the case with respect to reserves, provisions, allowances, other surpluses, retained earnings and deferred tax. With respect to deferred tax, it is our view that amounts reflected on the balance sheet as future income tax assets and liabilities will be included in the calculation of the capital tax base as deferred tax debits and credits. Regarding other items such as loans, advances, debentures and leases we will continue to look to the legal meaning of these terms to determine if an amount should be included.

With respect to construction holdbacks payable and receivable, we acknowledge that they do not constitute reserves or other surpluses for accounting purposes, but we believe they may be considered provisions within the definition of "reserves" in subsection 181(1). Comments received by Appeals from an accounting expert suggest that there may be a reasonable basis for concluding holdbacks payable are provisions but a comprehensive review has not been carried out in this regard.

We are currently reviewing the documents in our database dealing with reserves and surpluses and will be indicating those that can no longer be relied upon as a result of the recent jurisprudence.

We trust that these comments are helpful. If you have any questions, or wish to discuss these issues in further detail, please do not hesitate to contact Karen Cooper (957-8984) or myself (957-3497) directly.

F. Lee Workman
Manager
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch