Section 181

Subsection 181(1) - Definitions

Long-Term Debt

Administrative Policy

2 August 1991 T.I. (Tax Window, No. 7, p. 20, ¶1384)

Debentures issued by a savings and mortgage corporation would not be "subordinate indebtedness" if they represent the corporation's primary source of borrowing and are not subordinate in any manner to other indebtedness of the corporation.


Administrative Policy

6 December 2000 External T.I. 2000-0056245 - DEFERRED INCOME TAXES

The change in terminology under Canadian GAAP from deferred income taxes to future income tax assets and liabilities does not alter the legal nature of such amounts for LCT purposes.

27 July 2000 Internal T.I. 2000-0037177 - TEMPORARY AND PERMANENT WRITE DOWNS PART 1.3

A permanent write-down in the value of a capital asset of a corporation results in a reduction of the corporation's capital, whereas a write-down that is made due to a temporary impairment of the asset's value represents a reserve.

93 A.P.F.F. Round Table, Q.16

Where the value of a long-term investment has been written down as a result of a non-temporary decline in its value, such reduction will not be considered a "reserve".

Subsection 181(3) - Determining values and amounts


Canada v. Bombardier Inc., 2012 DTC 5088 [at 7005], 2012 FCA 46

The taxpayer, an aircraft producer, received advances from its customers, which the taxpayer applied as payments on partially complete contracts. In accordance with a US accounting standard which it followed in preparing its financial statements, it deducted the advances received from the contract costs incurred by it, in arriving at the "net" asset shown on its balance sheet in respect of the contracts, rather than recording the advances instead as a liability (although the full amount of the advances was disclosed in the notes to its financial statements). This accounting method also conformed with Canadian GAAP. The Minister argued that the advances should be included under the taxpayer's taxable capital for the purpose of s. 181.2, given that, legally speaking, they remained advances until the contract was concluded with transfer of ownership to the customer.

Based on the principle in Ford Credit that "subsection 181(3) of the Act requires that the accounting characterization or definition of the terminology appearing on the balance sheet be used in order to determine a corporation's capital," (para. 33) Létourneau JA found that the balance sheet treatment of the advances governed, so that they were not included in the taxpayer's capital. He also stated (at para.36):

To accept the submission by counsel for the appellant amounts to allowing the transaction's legal reality to prevail over its GAAP-required commercial reality and to eliminate the effects of the percentage-of-completion accounting method legitimately used by the respondent in keeping with GAAP.

Canada (Attorney General) v. Ford Credit Canada Ltd., 2007 DTC 5431, 2007 FCA 225

In finding that retractable preferred shares that the taxpayer had issued were not capital stock for purposes of s. 181.3(3)(b) because they were classified on its balance sheet as debt, Ryer J.A. rejected a submission on behalf of the Minister that "where a component of the capital of a corporation has an ordinary legal meaning, that meaning is to be given precedence" (para. 18) and that s. 181(3) required the use of GAAP as they were at the time that Part I.3 of the Act came into force in 1989.

See Also

Gaz Métro inc. c. Agence du revenu du Québec, 2017 QCCQ 3664

“mirror debt” arrangement did not result in a legal release of debt for GAAP and capital tax purposes

The plaintiff (“GMi”) borrowed in the capital markets and on-lent on identical terms to a limited partnership (“SCGM”) in which it had a 70% limited partner interest. GMi, whose business was carried on through SCGM, took the position that, under Canadian generally-accepted accounting principles, its borrowings should not be recognized as a liability, so that under GAAP it was only required to recognize as a liability the 70% share of its debt that, in economic substance, had been assumed by SCGM by virtue of SCGM servicing the GMi debt through the “mirror debt” issued by it.

It was accepted that whether the paid-up capital of GMi for Quebec capital tax purposes included 70% or 100% of the debt turned on whether under Canadian GAAP, GMi was permitted to “derecognize” its debt in this manner. GMi referenced SFAS 140, para. 16(b) of the Financial Accounting Standards Board in the U.S., which stated (as quoted at para. 94 of the judgment):

16. A debtor shall derecognize a liability if and only if it has been extinguished. A liability has been extinguished if…

  1. The debtor is legally released from being the primary obligor under the liability… by the creditor.

Fournier JCQ noted (at para. 140) that Chapter 3855, para. 46 of the CICA Handbook, which was adopted close to the beginning of the taxation years in issue, and was released in exposure draft form before then, was “essentially the same.”

In finding that GMi’s treatment did not accord with GAAP, and rejecting GMi’s submission that the concept of “legally released” was sufficiently ambiguous and controverted to leave scope for deference to the exercise of professional judgment by GMi’s accountants, he stated (at paras. 135-136, 191, TaxInterpretations translation):

[A]lthough SCGM assumed responsibility for the Obligations, the commitments taken on by it respecting the creditors did not result in a novation, and in that sense, did not release GMi from its obligations to them.

The creditors thus did not legally release GMi of its primary obligation respecting the Obligations.

It cannot be concluded…that the derecognition of the Obligations conformed with GAAP by virtue only of the choice exercised by GMi to take into account the substance of the transactions more than their legal form.

Words and Phrases

Ford Credit Canada Limited v. The Queen, 2006 DTC 3424, 2006 TCC 441

Retractable preferred shares in the capital of the taxpayer (a financial institution) were not included in its capital under s. 181.3(3)(a) given that in its balance sheet prepared in accordance with GAAP those preferred shares were treated as debt.

Royal Trustco v. The Queen, 2001 DTC 52 (TCC)

Sarchuk T.C.J. found that GAAP should be applied in determining the characterization of items for purposes of Part I.3 rather than just their carrying value given the evident reliance on GAAP in that Part.

Autobus Thomas Inc. v. The Queen, 99 DTC 259 (TCC)

Before concluding that amounts owing by the taxpayer represented by conditional sales contracts that had been assigned by the vendor to a bank were included in the taxpayer's capital under s. 181.2(3)(d), Dussault TCJ. indicated that some assistance was garnered from the presentation of the amounts in the taxpayer's audited financial statements as "notes payable" but noted (at p. 265) that "the title given to a particular item in financial statements is not necessarily determinative of the legal nature of what it is supposed to represent".

Oerlikon Aérospatiale Inc. v. The Queen, 97 DTC 962 (TCC), aff'd 99 DTC 5318 (FCA)

Before going on to find that prepayments received by the taxpayer for future work to be performed by it represented advances rather than reserves under GAAP and, therefore, were to be included in the taxpayer's capital under s. 181.2(3)(c), Archambault TCJ. found (at p. 970) that "accounting principles must be used to determine not only the value, but also the nature of the element set out in subsection 181.2(3)".

The Queen v. Consumers' Gas Co. Ltd., 87 DTC 5008, [1987] 1 CTC 79 (FCA)

With respect to an argument of counsel that the accounting method used by the taxpayer in offsetting reimbursements received by it against the carrying value of the related depreciable assets meant that such reimbursements were receipts that were "reflected" in its income statement, Hugessen J. stated (at p. 5010) that "the word 'reflected' is carefully chosen: the receipts themselves do not appear as income but, by reducing net cost, they go to reduce depreciation thereby increasing income."

Words and Phrases
Locations of other summaries Wordcount
Tax Topics - General Concepts - Accounting Principles 35
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment is of dollar amount 87

Administrative Policy

19 January 2009 Internal T.I. 2008-0305241I7 F - Impôt de la partie I.3 et PCGR

CRA can challenge taxpayer’s application of GAAP

After indicating that where the amount of the paid-up capital for ITA purposes of shares issued on a s. 85(1) rollover transaction exceeded the amount recorded for those shares on the GAAP-basis financial statements, the latter amount should be used in computing capital under s. 181.2(3)(a), the Directorate stated that “the Agency has the ability to challenge the application of GAAP where it is of the opinion that GAAP has not been applied in a specific situation [citing Ford Credit].”

2 August 2001 External T.I. 2001-008593 -

Where the financial statements of a subsidiary are revalued in accordance with section 1625 of the CICA Handbook, those adjustments are not to be backed out in determining the subsidiary's taxable capital.

3 July 2001 Internal T.I. 2001-0078917 - PARTNERSHIPS AND OVERDRAFTS PART 1.3

"Components that make up the amount shown on the face of the balance sheet, are amounts reflected in the balance sheet for purposes of subsection 181(3) and each component may be considered separately in determining the carrying value of the item to be included in counting capital or the investment allowance. Where the amount on the balance sheet that reflects the corporation's cash/indebtedness position at the end of the year is composed of a number of different bank account balances (both positive and negative), except for those balances for which there is a legal right of offset, it is our view that these balances have simply been aggregated and may be considered separately."

6 November 2000 Internal T.I. 2000-0050847 - DEEP DISCOUNT DEBT PART 1.3 TAX

Where a corporation has issued a bond at a discount, there is an argument that the full face amount of the bond should be included in the corporation's capital rather than the amount reflecting a reduction for the unamortized discount, if the full amount owing is disclosed in the notes. However, it is the Agency's "practice to not include amounts reflected in the notes where a bond is issued at a discount, unless the full face amount of the bond is reflected on the face of the balance sheet ... . In general, amounts reflected only in the notes to the financial statements are added to a corporation's capital only where it can be established that the additional amount actually reflects capital available to a corporation."

IT-532 "Income Tax Act, Part I.3 - Tax on Large Corporations"

9 February 1999 External T.I. 9808995 - LCT ON NON-RESIDENT CORPORATIONS

"For the purposes of subsection 181(3) the reference to GAAP ... does not necessarily mean GAAP under Canadian rules."

Locations of other summaries Wordcount
Tax Topics - Income Tax Regulations - Regulation 8601 28

10 February 1997 Internal T.I. 9701277 - PURCHASE AND SALE AGREEMENT - PART I.3

The obligation of the taxpayer under a purchase and sale agreement where a condition precedent had not yet been fulfilled did not represent either a reserve or a liability for large corporations tax purposes notwithstanding the inclusion of the liability in the taxpayer's balance sheet.

29 April 1997 Issue Statement 971054

In the case of an insurer that shows the carrying value of real estate on its balance sheet net of related encumbrances, Revenue Canada will look to the supporting schedules to the balance sheet which are filed with OSFI to determine the carrying value of the real estate as being gross of the encumbrances. The supporting schedules are an integral part of the balance sheet.

8 July 1996 Internal T.I. 9617717 - LEVERAGED LEASES AND PREPAID PENSION - PART I.3

Where the taxpayer's investment in leveraged leases is reflected as a single-line item on its balance sheet, but the notes to its financial statements disclose the amount of non-recourse debt that was deducted in arriving at the net figure, it is RC's view that the non-recourse debt is capital "reflected" in the balance sheet, given that section 1000.03 of the CICA Handbook states that the notes to the financial statements are an integral part of such statements.

22 February 1996 Internal T.I. 9604507 - PART I.3 - CAPITAL LEASES & CONDITIONAL SALES AGREEMENTS

"For purposes of Part I.3, and with respect to leases, it is the department's position that it is the legal nature of the agreement that governs irrespective of the accounting treatment or nomenclature used to describe or characterize the related transaction(s). If a lease is at law, at least, then it will be treated as such for Part I.3."

1996 Corporate Management Tax Conference Round Table, Q. 6

High-low preferred shares that are reclassified as debt for accounting purposes will be treated as equity although, by virtue of s. 181(3), the value to be assigned to those shares will be the amount reflected on the corporation's balance sheet.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(4) 59

31 July 1995 External T.I. 9518505 - PUSH-DOWN ACCOUNTING & PART I.3

Where balance sheet amounts have been written up through the application of push-down accounting as sanctioned by section 1625 of the CICA Handbook, such amounts will be used in the computation of large corporations tax.


For purpose of Part I.3, a corporation is entitled to change from one accounting policy to another, where both policies are in accordance with GAAP, the change is permitted under GAAP and then followed consistently. However, where consolidated financial statements are prepared for presentation to the shareholders, a corporation is not permitted to use a different accounting policy (also according with GAAP) for Part I.3 purposes.

10 March 1992 T.I. (Tax Window, No. 17, p. 22, ¶1794)

If GAAP requires bank account balances and bank loans to be disclosed separately, they cannot be netted for purposes of calculating capital under s. 181.2(3).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) 25

18 November 1991 T.I. (Tax Window, No. 13, p. 16, ¶1597)

A corporation is required to include in its capital its share of earnings of a partnership of which it is a member on the same basis that it would report its share of the partnership earnings for purposes of Part I.

Various T.I. (Tax Window, No. 2, p. 9, ¶1181)

Summaries of various technical interpretations indicating various anomalies.


R. Ashton, "Leasing: Recent Developments", 1997 Corporate Management Tax Conference Report, c. 11.

Paragraph 181(3)(b)

Subparagraph 181(3)(b)(i)

Administrative Policy

2 May 2017 External T.I. 2016-0663781E5 F - Meaning of retained earnings/calculation of capital

GAAP meant ASPE if ASPE followed by the corporation

On the initial application of accounting standards for private enterprises ("ASPEs") on January 1, 2011, a corporation revalued its assets (from their book value under “old” Canadian GAAP) to fair value, and increased its retained earnings accordingly. Does "retained earnings" in s. 181.2(3)(a) refer to that concept in Section 3251, Equity, ASPE; and would the revaluation be included? CRA responded:

As ASPE partially replaced former Canadian GAAP, the reference to GAAP in subparagraph 181(3)(b)(i) is considered a reference to ASPE. …

[I]f an entity adopts ASPE, the term retained earnings for the purposes of paragraph 181.2(3)(a) will be defined in accordance with ASPE. …

[T]he adjustment to the retained earnings of the corporation as a result of the revaluation of its assets will be taken into account for the purposes of paragraph 181.2(3)(a) to the extent that the presentation of such adjustment conforms with ASPE.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(a) appraisal increment in acordance with ASPE increased a corporation’s retained earnings 83

21 September 2007 External T.I. 2007-0229191E5 F - Agent de voyages & impôt de la partie I.3

customer advances received by travel agents and reported as deferred revenue in their balance sheets were required to be included in taxable capital even though amounts held in trust

Quebec and Ontario travel agents were required by provincial legislation to hold funds collected from clients for services to be rendered to them in a trust account, and also, in their year end balance sheets, reported the current balances in the trust accounts as assets and also as liabilities, labelled as "customer deposits and deferred revenue". CRA stated:

[A]mounts received by a travel agent from customers and shown as liabilities must be included in capital if they are covered by the provisions of subsection 181.2(3) even if they are required to be placed in trust under the Quebec or Ontario legislation described above.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(c) customer advances received by travel agents and reported as deferred revenue in their balance sheets were “advances” 112

Subsection 181(4) - Limitations respecting inclusions and deductions

Administrative Policy

2004 APFF Roundtable Q. 8, 2004-008675 -

In indicating that s. 181(4) would not provide relief where an insurance company issued $1 million of shares in order to acquire a building for $1 million (thereby resulting in an increase in its paid-up capital of $2 million, not $1 million, the Directorate stated that "subsection 181(4) ITA is for situations where the same balance sheet item is included pursuant to two or more Part I.3 ITA provisions which is not the case in the situation described."