12 February 2001 Internal T.I. 2000-0058187 - "Canadian assets" definition

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:

1. Do we look to the amounts on the balance sheet or the amounts that would be reflected in the return referred to in paragraph (a) of the definition of "Canadian assets" in section 8600 of the Income Tax Regulations ("Regulations") to determine the amount of a "Canadian asset"?

2. Are intercompany accounts to be eliminated as required by the Office of the Superintendent of Financial Institutions ("OSFI") when determining which assets are "Canadian assets"?

3. The return referred to in paragraph (a) of the definition of "Canadian assets" in section 8600 of the Regulations is to be prepared for the OSFI using the equity method of accounting. When computing the amount of the "Canadian assets" are we to follow the requirement in paragraph 181(3)(a) of the Income Tax Act which stipulates that the equity method of accounting is not to be used in determining the carrying value of a particular asset?

4. Same question as 2 above but when dealing with a financial institution other than a bank.

5. Is an interest in a non-resident partnership to be listed on the return referred to in paragraph (a) of the definition of "Canadian assets" in section 8600 of the Regulations?

Position:

1. The carrying value of the asset as reflected on the balance sheet is to be used.

2. The intercompany accounts are not to be eliminated.

3. The equity method of accounting is not to be used.

4. The intercompany accounts are not to be eliminated.

5. It would not be included.

Reasons:

1. The reference to the return in paragraph (a) of the definition of "Canadian assets" in section 8600 of the Regulations is only for purposes of identifying which assets are to be included in capital.

2. The relevant return is to be prepared on a non-consolidated basis.

3. Paragraph 181(3)(a) of the Income Tax Act provides that the equity method of accounting is not to be used.

4. The relevant return is to be prepared on a non-consolidated basis.

5. Confirmed by the OSFI.

		February 12, 2001

TORONTO NORTH TSO	HEADQUARTERS
Audit Directorate 	Income Tax Rulings
Industry Specialist Services 	  Directorate
M. Trotier
Attention:  Doug Mitchell
	      Banking Specialist
		2000-005818

Definition of "Canadian assets"

This is in reply to your memorandum of November 22, 2000 dealing with the definitions of "Canadian assets" and "Total assets" in sections 8600 and 8603 of the Income Tax Regulations ("Regulations") for purposes of Part I.3 and Part VI of the Income Tax Act ("Act") respectively.

We will answer your queries in the same order as set out in your November 22, 2000 memorandum. While our comments are with respect to Part I.3 they apply equally to Part VI since the definitions of "Canadian assets" and "Total assets" in section 8603 of the Regulations for purposes of Part VI tax are tied to these same definitions found in section 8600 of the Regulations for purposes of Part I.3 tax.

1. You asked for clarification with respect to the definition of "Canadian assets" in section 8600 of the Regulations and more specifically whether or not the amount of each of the "Canadian assets" is to be computed from the balance sheet or the return referred to in that definition (herein referred to as the "Domestic Asset Return"). We are of the opinion that the reference to the Domestic Asset Return is solely for the purpose of determining which assets are to be taken into account as "Canadian assets". The carrying value of an asset required to be listed on the Domestic Asset Return is the amount reflected on the balance sheet for the year under review as would be the case in computing the amount of an asset for purposes of the definition of the "Total assets".

2. Your second query dealt with intercompany loans made by a bank to a controlled corporation which are to be eliminated from the Domestic Asset Return as required by the Office of the Superintendent of the Financial Institutions ("OSFI"). The OSFI requires that the Domestic Asset Return be prepared on a consolidated basis such that intercompany accounts are to be eliminated. You are concerned that these intercompany loans are not taken into account in the calculation of the "Canadian assets". Paragraph (a) of the definition of "Canadian assets" in section 8600 of the Regulations stipulates that for purposes of the definition of "Canadian assets" the Domestic Asset Return is to be prepared on a non-consolidated basis. Consequently the intercompany loans referred to above would be taken into account in the computation of the "Canadian assets".

3. The OSFI requires that the Domestic Asset Return be prepared using the equity method of accounting. You asked for confirmation that when computing the carrying value of the assets listed on the Domestic Asset Return paragraph 181(3)(a) of the Act applies such that the amount of these assets will be computed without using the equity method of accounting. As indicated in our response to your first query, we look to the Domestic Asset Return only to identify the assets which are to be taken into account for purposes of determining the "Canadian assets". However, we do not use the values reported on the Domestic Asset Return to determine the carrying value of the assets so listed. Accordingly the carrying value reflected on the balance sheet is required by paragraph 181(3)(a) of the Act to be restated without using the equity method of accounting.

4. Your fourth query was whether or not our comments with respect to your second query would also be applicable with respect to a financial institution other than a bank. We can confirm that the comments we made with respect to your second query would also be applicable with respect to a financial institution other than a bank. Where the financial institution is not a bank the amounts to be included as "Canadian assets" are those that would be included if the financial institution was a bank as provided for in paragraph (a) of the definition of "Canadian assets" in section 8600 of the Regulations.

5. You would like to know whether or not an interest in a non-resident partnership would represent a domestic asset for purposes of the Domestic Asset Return. We note that such a determination can only be made by the OSFI. Following verbal discussions with the OSFI, it is our understanding that such an interest would not be included as a domestic asset for purposes of the Domestic Asset Return.

We trust that the above will be of assistance. If you require further information or would like to discuss further please do not hesitate to contact Michèle Trotier at (613) 957-3494 or F. Lee Workman at (613) 957-3497.

Yours truly,

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