7 July 1991 Income Tax Severed Letter - Various issues relating to the 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.

Dear Sirs:

Re: Large Corporations Tax

We are writing in response to your correspondence of June 26, 1990 wherein you posed a number of questions relating to the tax on large corporations provided for in Part I.3 ("Part I.3 Tax") of the Income Tax Act. We apologize for the extensive delay in our reply which was occasioned by a comprehensive review of a number of issues related to the pertinent subject matter, many of which issues were addressed in your letter. Also, as you are undoubtedly aware, Bill C-28, in which Part I.3 Tax was introduced, was assented to on October 23, 1990 and amendments to the legislation and the attendant Income Tax Regulations have since been announced by the Department of Finance.

Several of your questions deal directly or indirectly with filing requirements, the necessity to file and the allocation of the $10,000,000 capital deduction among related corporations. We would advise that the Assessing Division of the Department has formulated certain policies in these areas and, accordingly, we have forwarded a copy of your letter to them requesting that they reply directly to you where these particulars are concerned. With respect to the allocation of the $10,000,000 capital deduction we would draw your attention to the proposed amendment to subsection 181.5(7) of the Act as announced by the Department of Finance in November, 1990 which would provide that a Canadian-controlled private corporation will not be considered to be related to another corporation at a particular time for the purposes of inter alia, section 181.5 of the Act unless it is also associated with that other corporation at that time.

We would also note that proposed section 221.1 of the Act as announced by the Department of Finance in July, 1990 would provide that, insofar as liability for interest charges on later or deficient instalment payments is concerned, any amendment to the Act will be deemed to have come into force at the commencement of the last taxation year commencing before the taxation year or part thereof to which the amendment is first applicable.

Your next question relates to bankrupt corporations which, pursuant to section 181.3, of the Act are exempt from Part I.3 Tax. As you note, however, paragraph 128(1)(d) of the Act provides for a deemed taxation year ending on the day immediately before the day on which the corporation became a bankrupt and, consequently, the corporation is not a bankrupt as of the end of that taxation year. It is our opinion that the bankrupt as of the end of that taxation year. It is our opinion that the bankrupt corporation is liable for Part I.3 Tax in respect of that taxation year deemed to have ended and that the capital deduction must be shared with any corporations with which it is then related. The bankrupt corporation will not be liable for any Part I.3 Tax in respect of any subsequent taxation year if it is bankrupt at the end of that particular year, however, the corporation would remain as a member of the related group of corporations and, as such, should be included on form T2150 although, presumably, the amount of the capital deduction allocated to it in those future years would be nil.

With respect to bank overdrafts and lines of credit, it is our opinion that these items would be included in the calculation of the capital of a corporation pursuant to paragraph 181.2(3)(c) as such amounts are more accurately considered "loans or advances" rather than "other indebtedness" as that particular term is used in paragraph 181.2(3)(f) of the Act. A line of credit will be so included only to the extent it has been utilized or drawn upon.

In a situation in which accrued interest, whether receivable or payable, is accounted for as an addition to the particular debt instrument, it is our opinion that only the principal amount of the debt would be utilized in the calculation of the capital or the investment allowance of a corporation as the case may be. Any amount of interest payable would also be included in the calculation of the capital of a corporation as an "other indebtedness" pursuant to paragraph 181.2(3)(f) of the Act to the extent that it is outstanding in excess of 365 days. Interest receivable, however, would never qualify for inclusion in the investment allowance of a corporation pursuant to any of the provisions of subsection 181.2(4) of the Act.

You have also requested our comments with respect to several miscellaneous questions provided by your staff regarding Part I.3 Tax. The first query concerns filing requirements and the allocation of the investment allowance among related corporation and, as noted previously, we are forwarding this particular question to the Assessing Division of the Department for a response.

The second question relates to the due date for filing the Part I.3 Tax return and we would agree with the response provided by you that, pursuant to section 181.6 of the Act, the return is due at the same time as the corporation income tax return under Part I of the Act. Also, as noted, the return and the agreement to allocate the capital deduction are to be filed in duplicate, separate from the corporate income tax return and are to be filed at the Taxation Centre with which the corporate income tax return under Part I of the Act is filed.

The next question concerns marketable securities held as a portfolio investment which have been written down for accounting purposes and, more particularly, the effect of the write down upon the calculation of the capital and the investment allowance of the corporation for the purpose of Part I.3 Tax. Mr. Seidel of this office wrote to you on September 6, 1990 relative to a similar topic and while we will not reiterate his comments we would offer the following additional observations. Paragraph 3050.33 of the Handbook of the Canadian Institute of Chartered Accountants recommends, in terms of a decline in the value of a long-term investment that is other than temporary, that the investment should be written down to recognize the loss and, further, that the write down is to be included in the determination of income. Paragraph 3050.31 of the Handbook describes a number of situations which may indicate that there has been an impairment in the value of a long-term investment and under what conditions the impairment can be considered to be other than temporary. To the extent that these recommendations are followed in the write down of a long-term investment, the Department would not consider the write down to be a reserve for the purpose of calculating the capital of a corporation pursuant to paragraph 181.2(3)(b) of the Act. Should the write down reflect only a possible, contingent or temporary decline in the value of the investment, the Department would consider such a write down to constitute a reserve for the purposes of calculating the capital of the corporation. Further, the determination of whether a write down in value represents a temporary impairment in the value of an investment or otherwise would be a question of fact in any particular situation. Insofar as the determination of the investment allowance of the corporation is concerned, it would be the carrying value of the particular investment as determined in accordance with subsection 181(3) of the Act which would be utilized in each case.

The next question is with respect to payments and instalments of Part I.3 Tax. Pursuant to subsection 181.7(1) of the Act, instalments are required and are based upon the least of three amounts. The first amount is the corporation's estimated tax payable for the year, the second is the amount of the Part I.3 Tax payable by the corporation for the immediately preceding year (the first instalment base) and the third amount is a combination of the first two amounts (the second instalment base).

The instalment bases are, pursuant to paragraph 181.7(2)(a) of the Act, to be calculated on the assumption that preceding taxation years consisted of 365 days. Also, for the purpose only of determining the instalment bases for taxation years ending before July 1993, paragraph 181.7(1)(c) requires the assumption that Part I.3 Tax was in effect for taxation years ending before July 1989 and paragraph 181.7(1)(d) that the Part I.3 Tax payable for the first taxation year ending after June 1989 would be the tax payable for a full taxation year. The estimated tax is to be paid in monthly instalments throughout the taxation year with any balance payable on the same date as the Part I Tax balance due date.

The next question deals with a corporation which had decided not to make instalments or final payment of the Part I.3 Tax until the passage of the enabling legislation. As the legislation has now been enacted, we are unable to respond to this question as any corporation which followed this course of action and was either charged interest or penalized for late filing would be required to pursue the matter through the Notice of Objection procedures should the corporation disagree with the particular assessment.

The next question concerns situations encountered in the calculation of the capital of a corporation pursuant to subsection 181.2(3) in which amounts, such as capital cost allowance, have been deducted for tax purposes but not for accounting purposes. Pursuant to subsection 181(1) of the Act, allowances in respect of depreciation and depletion are excluded from the definition of "reserves" and, consequently, no adjustment is required in respect of any difference between net book value and the undepreciated capital cost of assets in the determination of the capital of a corporation for the purpose of Part I.3 Tax.

We would further note that "reserves", as that term is defined in subsection 181(1) of the Act, are included in the calculation of the capital of a corporation pursuant to paragraph 181.2(3)(b) "except to the extent they are deducted in computing its income for the year under Part I" of the Act. Consequently, to the extent that the reserve deducted under Part I of the Act is equal to or greater than the accounting reserve, no amount in respect of the reserve is included in the calculation of the capital of the corporation. To the extent that the accounting reserve exceeds the reserve deducted in computing income under Part I of the Act, only that excess is included. Should the reserve deducted for income tax purposes exceed the accounting reserve, however, that excess amount will not constitute a deduction from an otherwise positive calculation of the capital of a corporation.

We would also agree that deductions in respect of the amortization of cumulative eligible capital amounts are encompassed within the phrase "depreciation and depletion" in the definition of reserves in subsection 181(1) and are, therefore, not to be included as a reserve for the purpose of computing the capital of a corporation.

The next question deals with the treatment of leases in the calculation of the capital and the investment allowance of a corporation for the purpose of Part I.3 Tax. We would agree with the response provided by yourself that leases are excluded from the calculation of the capital of a corporation by virtue of the specific exclusion in paragraph 181.2(3)(f) of the Act. Similarly, it is the view of the Department that any amount receivable in respect of a lease will not qualify for the investment allowance of a corporation pursuant to any of the provisions of subsection 181.2(4) of the Act.

The next question is with respect to the filing of amended Part I.3 Tax returns and, as with other questions on this topic, we are forwarding this query to our Assessing Division for reply. With respect to deferred revenue, it is the view of the Department that such amounts constitute a "loan or advance to the corporation" as contemplated in paragraph 181.2(3)(c) of the Act and are, accordingly, to be included in the calculation of the capital of the corporation.

The next question deals with shares of a mutual fund and we would concur with your opinion that such shares would be included in the computation of the investment allowance of a corporation pursuant to subsection 181.2(4) of the Act only to the extent that the investment is represented by shares of a mutual fund corporation and not by units of a mutual fund trust.

With respect to appraisal surpluses, we would agree with the response given by yourself that such amount are to be included in the calculation of the capital of a corporation pursuant to paragraph 181.2(3)(a) of the Act.

The final question is with respect to filing requirements and we would note that it is our understanding that financial statements need not be filed with the Part I.3 tax return, however, they should be retained for examination by the Department.

While we trust that our opinions may be of assistance to you we would advise that they do not constitute an advance income tax ruling and are, therefore, not binding upon the Department in respect of any particular situation.