7 August 1990 Income Tax Severed Letter - Proposed part I.3 tax on large corporations

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 Sir:

Your correspondence of February 28, 1990 addressed to the Department of Finance concerning certain aspects of the proposed Part I.3 Tax on Large Corporations has been forwarded to us for reply.

We apologize for the delay in responding to your letter.

With respect to your initial query, it is our view that a Bankers' Acceptance would not be included in the determination of the investment allowance of a corporation pursuant to draft subsection 181.2(4) of the Income Tax Act. It is our opinion that a Banker's Acceptance constitutes an obligation of the issuing bank rather than the ultimate corporate debtor and is, therefore, not an asset described in draft paragraph 181.2(4)(c) of the Act. Furthermore, we do not envisage any conditions under which these types of investments would be so included in that calculation.

The second and third of your queries appear to be similar except that the second question concerns a transaction on account of income while the third situation is on account of capital. As a point of clarification, we would note that it is not the deferred revenue which is a component of the taxable capital calculation but rather the amount of any reserve which is claimed in relation to an amount included in income for purposes of Part I of the Income Tax Act. Also, pursuant to draft paragraph 181.2(3)(b) of the Income Tax Act, this reserve is included in the calculation of the capital of a corporation only to the extent that it has not been deducted for purposes of Part I. In your two examples, the amount included in the capital calculation is the amount of the reserve as there has been no amount claimed for income tax purposes.

Your fourth query relates to funds borrowed in a foreign currency which, when combined with a foreign exchange hedge contract, will result in a gain to be realized upon repayment of the debt. The expected gain is treated as deferred revenue and is included in income over the life of the debt. Accordingly, you have asked if this deferred revenue should be considered in the determination of the capital of a corporation pursuant to draft subsection 181.2(3) of the Income Tax Act. As in the previous examples we would note that it is the reserve amount which is included in the calculation rather than the deferred income, notwithstanding that the two amounts may be equal. Consequently, pursuant to draft paragraph 181.2(3)(b) of the Income Tax Act, this reserve amount would be included in the calculation of the capital of a corporation to the extent that it has not been deducted in computing income for the purposes of Part I of the Act.

We would also advise that the opinions expressed above are based upon the amendments to the Income Tax Act proposed in Bill C-28 as passed by the House of Commons on December 20, 1989 and those published by the Department of Finance in July, 1990. Further, 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.