Subsection 181.2(1)
Administrative Policy
16 May 2001 External T.I. 2000-0053585 F - IGS SOCIETE DE PERSONNES
A private corporation that is not a registered securities dealer but is a member of a partnership that is registered or licensed and is authorized under provincial legislation to trade in securities as agent or principal computes its capital in respect of its interest in the partnership pursuant to s. 181.2 rather than s. 181.3. The partnership would not be a financial institution within the meaning of s. 181(1).
Subsection 181.2(3) - Capital
Cases
Autobus Thomas Inc. v. The Queen, 2000 DTC 6299 (FCA), briefly aff'd 2001 DTC 5665, 2001 SCC 64
The taxpayer partly financed the acquisition of buses by means of its bank purchasing conditional sales contracts from a manufacturer. Marceau J.A. found that the contractual relationship between the bank and the taxpayer was determined by the initial contract between them when a line of credit was established. Accordingly, both ss.181.2(3)(c) and (d) applied: the money owed by the taxpayer to the bank under the line of credit was both a loan and also a debt secured by the transfer of rights set out in the conditional instalment sales contracts.
Oerlikon Aérospatiale Inc. v. R., 99 DTC 5318, [1999] 4 CTC 358 (FCA)
The taxpayer financed its work on the manufacture of defence products under two contracts by receiving advances from the prime contractor or an affiliated company. Noël J.A. found that the advances did not qualify as reserves which were included in capital under s. 181.2(3)(b) because the taxpayer had claimed a reserve for s. 20(1)(m) purposes. Instead, the amounts were included under s. 181.2(3)(c) as advances. Noël J.A. stated (at p. 5325):
"The effect of an advance, be it in the sense of a payment on account or a loan, is to make the amount of money it represents available to the person or corporation which receives it. In the instant case, the advances were an integral part of the financial resources available to the appellant at the end of its 1989 fiscal year ... ."
See Also
Canadian Forest Products Ltd. v. The Queen, 2004 DTC 2869, 2004 TCC 405
The amount of outstanding cheques of the taxpayer that it had issued to suppliers but which had not yet cleared were not includable in its capital. They did not represent an "advance" ("something made before it is actually due") nor a "loan" ("a liability created between the lender and the borrower resulting from the advancing of the funds") (p. 2882).
There was no basis for extending the administrative policy of the Minister, that allowed corporations to offset cash balances against unpresented cheques, to permit the taxpayer to set-off bankers' acceptances and commercial paper against the amount of outstanding cheques.
Upper Lakes Shipping Ltd. v. Minister of National Revenue, 98 DTC 6264, [1998] 3 CTC 281 (Ont CA)
Given that generally accepted accounting principles require that a government grant relating to a capital asset be included in retained earnings or "earned surplus" only as the assets are used in the operation of the business, the taxpayer was permitted to follow the same approach in computing its paid-up capital for Ontario capital tax purposes.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Other Legislation/Constitution - Ontario - Corporations Tax Act - Section 53 - Subsection 53(1) | 57 |
Administrative Policy
12 February 2004 Internal T.I. 2003-0027201I7 - Swaps and Part I.3 Tax
Where the principal amount under interest rate or currency swap contracts was only notionally exchanged, there was no amount that would constitute a "loan or advance" for purposes of either the computation of "capital" or of the "investment allowance". The result would be the same even where under the confirmation in the related ISDA Master Agreement there was provision for actual exchanges of principal amounts provided that (having reference to s. 181.2(3)(f)) indebtedness had not remained outstanding for more than 365 days at the end of the taxpayer's fiscal period.
31 December 2002 External T.I. 2002-0163545 - construction deferred revenue
In light of the decision in PCL Construction Management Inc. v. The Queen, 2002 DTC 2624 (TCC), deferred revenue of a contractor with respect to its long-term construction contract would be included in capital only to the extent that amounts had been received under the contract (on the basis that such amounts represented advances and would be included under s. 181.2(3)(c)). As indicated in that decision, the words "reflected in the balance sheet" indicated that it is appropriate to examine the components of an amount on the balance sheet to determine what portion thereof reflected amounts that were included in capital.
Income Tax Technical News, No. 18, 16 June 2000
Discussion of Oerlikon decision.
29 November 2001 Internal T.I. 2001-0106227 - PREPAID LEASE OBLIGATIONS
The taxpayer transfers a portfolio of office equipment and related leases to a special purpose vehicle ("SPV"), the SPV uses borrowed money to pay the purchase price to the taxpayer, the taxpayer repurchases the equipment from the SPV using securitization proceeds as payment, the SPV leases the equipment from the taxpayer, and the SPV prepays its lease obligations utilizing the proceeds received by it from the sale of the assets to the taxpayer, and the taxpayer uses the lease prepayment to reduce its outstanding indebtedness. Although the lease prepayment received by the taxpayer from the SPV would be considered to be an "advance", it would not give rise to capital for LCT purposes because no amount would be reflected in the corporation's balance sheet in respect of those amounts. "Unless the prepaid lease amounts can be clearly identified as a component of the amounts reflected in the notes to the financial statements (i.e., part of an aggregate amount), we are of the view that no amount is included in [the taxpayer's] capital in respect of prepaid lease amounts for the [taxpayer's] taxation year ..."
3 July 2001 Internal T.I. 2001-0078917 - PARTNERSHIPS AND OVERDRAFTS PART 1.3
"A corporate partner's share of earnings from a partnership's fiscal period ended in the corporate partner's taxation year would have to be included in the corporate partner's taxable capital, whether or not such earnings have been distributed to the corporate partner ... . With respect to undistributed stub period earnings of a partnership, it is our general view that such amounts would not be included in the corporate partner's taxable capital."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 117 |
IT-532 "Income Tax Act, Part I.3 - Tax on Large Corporations"
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 0 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(4) | 0 |
1 June 2000 Internal T.I. 2000-0006167 - LARGE CORPORATION TAX GOLD CONSIGNMENTS
A consignment agreement between a bullion bank and a jeweller was characterized as a loan or advance for LCT purposes.
5 April 2000 Internal T.I. 1999-0015087 - CONSTRUCTION CONTRACTORS
"Amounts billed by a subcontractor that are subject to a holdback requirement constitute a contingent liability of the contractor, and generally would be included in the contractor's capital as a reserve. Once the subcontractor's work that is the subject of the billing is certified, the amount owing by the contractor in respect of the certified work constitutes a legal liability of the contractor, and would be included in the contractor's capital as indebtedness, if the amount has had the character of indebtedness for more than 365 days at the end of the taxation year."
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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A | 35 | |
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 47 |
7 November 1996 External T.I. 9636805 - CICA 3860 AND LARGE CORPORATIONS TAX
A deficit shown as such on a balance sheet and created by the application of section 3860 of the CICA Handbook to redeemable and retractable high-low preferred shares is deductible under s. 181.2(3)(i).
9 September 1996 External T.I. 9621855 - LARGE CORPORATIONS TAX AND AUTOMOBILE DEALERSHIPS
It appeared that where an automobile dealership acquired vehicles from the manufacturer by way of a wholesale conditional sales contract, the obligation of the dealership to the manufacturer would be a loan or an advance under s. 181.2(3)(c) or a note or similar obligation under s. 181.2(3)(d), rather than other indebtedness under s. 181.2(3)(f).
8 July 1996 Internal T.I. 9617717 - LEVERAGED LEASES AND PREPAID PENSION - PART I.3
A prepaid pension asset reflecting pension funding amounts which have been deducted for income tax purposes but not for accounting purposes is not deducted in computing capital.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 78 |
22 February 1996 Internal T.I. 9604507 - PART I.3 - CAPITAL LEASES & CONDITIONAL SALES AGREEMENTS
The obligation of a purchaser under a conditional sales agreement generally will be included in its capital only where such obligation has been outstanding for more than 365 days, unless the obligation is evidenced by the issuance by it to the vendor of a note.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 62 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(4) | 62 |
1996 Tax Executive Institute Round Table, Q. 16 (No. 9638910)
Where, in accordance with CICA Handbook Section 3860, a U.S. $100 million debt is hedged through entering into a currency swap, an increase in the Canadian dollar equivalent of the debt will not be offset through any deduction being available for the accrued gain on the swap. Conversely, if the Canadian dollar equivalent of the debt declines, there is no provision to recognize the liability under the hedge (although it may be arguable that this amount may be included in capital under s. 181.2(3)(b)).
1996 Tax Executive Institute Round Table, Q. 8 (No. 9638920)
As the Tax Court did not consider the legal basis for RC's position on the capital tax treatment of outstanding cheques, the adverse decision in Grocery People Ltd. v. MNR has not caused RC to reconsider its position.
20 July 1995 Internal T.I. 9517946 - DEFERRED REVENUE AND LARGE CORPORATIONS TAX
Detailed discussion of the circumstances in which deferred revenue amounts will be included in capital.
9 June 1995 Internal T.I. 9515177 - LARGE CORPORATIONS TAX HEALTH WELFARE PLAN DEFERRED
Where the corporate taxpayer (which was not a financial institution) had an actuarial determination done of the amount that would be necessary to fund its obligations in respect of retired employees covered under a health and welfare plan, then set up a deferred charge for accounting purposes in respect of such obligation, with this deferred charge being reduced over time as the taxpayer started to fund its obligation, the amount of the deferred charge would represent a reserve for purposes of s. 181.2(3)(b).
May 1995 Tax Executive Institute Round Table, Q. 22 (C.T.O. "Part I.3, Advances")
An advance billing, that remains unpaid at a year end, made with respect to services to be rendered in a subsequent year, would not be considered to be an "advance" (as defined, for example, in Black's Law Dictionary, and in TransCanada Pipelines Ltd. v. Minister of Revenue (Ontario) (1992), 62 O.A.C. 105).
7 May 1995 Internal T.I. 9510220 - PART I.3, O/S CHEQUES & OVERDRAFTS
Bank overdrafts are considered to have arisen to the extent that they have been utilized or drawn upon. For these purposes, RC, in common law jurisdictions, applies the conditional payment principle established in such cases as Marreco v. Richardson (1908), 2 K.B. 584, at 593 (C.A.) and Moody v. MNR, 57 DTC 1050, at 1054 (Ex Ct).
Furthermore, the writing of a cheque by a corporation which has overdraft privileges, with a resulting negative bank balance on the corporation's balance sheet, is regarded as a loan or advance in that the "bank has, by granting the taxpayer overdraft privileges, tacitly acknowledged or agreed to the overdraft".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | conditional payment principle accepted | 77 |
13 October 1994 External T.I. 9413095 - CORP.PARTNERSHIPS & PART I.3
Discussion of the application of Part I.3 to loans to and from corporate partnerships, loans between partnerships and the impact of equity-based accounting for partnership interests.
Revenue Canada Round Table, 1994 Alberta Conference, Q. 10 (C.T.O. "Large Corporation Tax - Foreign Exchange Gains/Losses")
There is no adjustment to capital in respect of the amount of deferred foreign exchange losses reported on the balance sheet. Deferred unrealized foreign gains reflected in the balance sheet may constitute a reserve that would be required to be included in capital.
Revenue Canada Round Table TEI, 16 May 1994, Q. 6 (C.T.O. "Part I.3 Tax - Deferrred Revenue")
Deferred revenue must be included in the computation of capital irrespective whether or not a tax deductible reserve is available.
Revenue Canada Round Table TEI, 16 May 1994, Q. 6
A bank overdraft is excluded from a corporation's capital to the extent it is made up of outstanding cheques assuming that the giving of the cheques did not operate as payment at that time.
13 May 1994 Internal T.I. 9333017 - LARGE CORPORATION TAX AND INVESTMENT TAX CREDITS
Unclaimed or unexpired investment tax credits are not deferred tax debits and therefore do not reduce capital pursuant to s. 181.2(3)(h).
7 December 1993 Income Tax Severed Letter 9332865 - Large Corporation Tax
Where a corporation that issues bankers' acceptances and deposits the proceeds with the bank in order for the bank to provide operating loans to affiliates of the corporation, the indebtedness represented by the bankers' acceptances will not be reduced by the amount on deposit with the bank.
December 1992 B.C. Tax Executives Institute Round Table, Q. 7 (October 1993 Access Letter, p. 479)
Deferred revenue constitutes a "loan or advance" to the corporation. A deferred charge is a "reserve", and therefore must be included in capital to the extent it has not been deducted in computing Part I income. Share warrants or options potentially can give rise to "other surplus".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | 48 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(4) | 27 |
10 September 1992 Memorandum (Tax Window, No. 24, p. 18 ¶2194)
Contributions received by a regulated utility from its customers to compensate it for the insufficiency of revenue it will receive from special equipment installed by it to service that customer, where such contributions appear on the corporation's balance sheet, will constitute advances for purposes of s. 181.2(3)(c).
92 CPTJ - Q.9
Because the term "advance" often means simply "pay" or "pay money before it is due", a take- or-pay amount is an advance for purposes of s. 181(3)(c).
5 August 1992 T.I. 921651 (May 1993 Access Letter, p. 207, ¶C180-138; Tax Window, No. 23, p. 16, ¶2132)
Where a property development company has debited "land under development" and credited "provision for cost to complete" for an estimate of costs to complete land under development, that amount will not constitute a reserve assuming that it does not represent a liability, an expense for accounting purposes, an adjustment of retained earnings, or an appropriation of retained earnings similar to a reserve for plant expansion.
16 March 1992 T.I. (Tax Window, No. 18, p. 14, ¶1808)
The factoring by a foreign parent of accounts receivable owing to it by its Canadian subsidiary will not, by itself, convert that indebtedness of the Canadian subsidiary into a loan for large corporations tax purposes.
10 March 1992 T.I. (Tax Window, No. 17, p. 22, ¶1794)
Both security deposits and deferred revenue of a corporation are considered to be advances to the corporation that must be included in capital.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 26 |
91 C.R. - Q.37
A corporate member of a joint venture will have its share of the indebtedness of the joint venture included in its capital.
91 C.R. - Q.36
Where there has been a write-down in accordance with GAAP to reflect other than a temporary decline in the value of a capital asset, the write-down will not be considered to be a "reserve".
91 CPTJ - Q.13
Amounts received by a vendor under a take-or-pay gas purchase contract are "advances to the corporation".
November 1991 Memorandum and 14 November 1991 T.I. (Tax Window No. 13, p. 15, ¶1582)
If a corporation that is a member of a joint venture is solely liable for any indebtedness related to the joint venture, the full amount of such indebtedness will be included in its capital. Alternately, if it is jointly liable, only its share of the indebtedness will be included.
25 October 1991 T.I. (Tax Window, No. 12, p. 14, ¶1553)
A policy loan to a corporation against the cash render value of a life insurance policy is an advance within the meaning of s. 181.2(3)(c), although the cash render value of the policy is not included as "long-term debt" for purposes of the investment allowance under s. 181.2(4).
The definiton of "subordinated indebtedness" in the Insurance Companies Act (Canada) is relevant to the determination of subordinate indebtedness of an insurer for purposes of the Act.
18 September 1991 T.I. and 27 September 1991 T.I. (Tax Window, No. 9, p. 14, ¶1454)
Where a corporation issues a bond to a partnershp of which it has a 1/3 interest, it is required to include the bond in computing its capital but is entitled to an investment allowance of 1/3 of that amount.
Where a partnership issues a bond to a corporate member, no part of the indebtedness will be included in the computation of the capital of the corporate partners.
Where a partnership issues a bond to a corporation which is not a member, each corporate partner will include its proportionate share of the bond in computing its capital, and the corporation holding the bond will not be entitled to an investment allowance. Accordingly, both the holder of the bond and the corporate partners may pay Part I.3 tax on the same amount.
8 July 1991 T.I. (Tax Window, No. 5, p. 6, ¶1329)
Discussion of various issues.
10 June 1991 T.I. (Tax Window, No. 4, p. 26, ¶1294)
Amounts in respect of the write-down of amortizable capital assets which are included in accumulated depreciation pursuant to paragraph 3060.58 of the CICA Handbook are not included in "reserves".
5 June 1991 T.I. (Tax Window, No. 4, p. 25, ¶1281)
The undistributed earnings of a partnership are not included in the capital of a corporate partner.
Articles
Anthony Schiefer, "Buyer Beware - Structuring to Minimize to Minimize Capital Tax Consequences of a Share Purchase", Corporate Structures in Groups, Vol. IV. No. 1, p. 300
Discussion of techniques to use interest expense of purchaser to shelter taxable income of target.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) | 17 |
Harris, "Developments in Asset-backed Financing: Tax Considerations", Business Vehicles, Vol. III, No. 3, 1997, p. 136
It is suggested that a rent prepayment under a lease is not an "advance".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 2 - Subsection 2(3) - Paragraph 2(3)(b) | 36 | |
| Tax Topics - Income Tax Act - Section 9 - Timing | 0 |
Paragraph 181.2(3)(a)
Administrative Policy
2 May 2017 External T.I. 2016-0663781E5 F - Meaning of retained earnings/calculation of capital
On the initial application to it 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. After stating that “as ASPE partially replaced former Canadian GAAP, the reference to GAAP in subparagraph 181(3)(b)(i) is considered a reference to ASPE,” CRA found that since this increase accorded with ASPEs, such increase also increased the corporation’s capital under s. 181.2(3)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) - Paragraph 181(3)(b) - Subparagraph 181(3)(b)(i) | GAAP meant ASPE if ASPE followed by the corporation | 162 |
5 February 2003 External T.I. 2002-0178395 F - PARTIE 1.3 AIDE GOUVERNEMENTAL/SURPLUS
Would government assistance disclosed in the financial statements, by way of note, as a reduction in the cost of capital property be surplus for the purposes of the definition of capital? CCRA responded:
[W]here an expression in Part I.3 of the Act is derived essentially from accounting nomenclature, the accounting treatment of the item in question will be used to determine whether the item is included in the computation of capital. However … consideration should continue to be given to legal form with respect to items that are required to be included in the computation of capital either as loans, advances or indebtedness.
Consequently … the amount of a government grant that is presented by way of note to the financial statements as a reduction of capital property is not "any other surplus" … [and] will not be included in capital pursuant to paragraph 181.2(3)(a).
12 March 2001 Internal T.I. 2000-0037637 F - Partie 1.3 Aide gouvernementale/Surplus
The taxpayer received government grants which were deducted in the capital asset amount shown on its balance sheet. However, a note to the financial statements showed the cost of the capital assets and the deduction therefrom for the grants net of amortization.
In finding that the grant amounts should be included in capital under s. 181.2(3)(a), the Directorate stated:
[T]he net amount of … government grants, which is not a loan or advance, constitutes funds that the government has injected into the taxpayer. Since the government did not receive capital stock in return for that injection of money and since such grants are not contributed surplus, we are of the view that it is other surplus within the meaning of the expression “any other surpluses” in paragraph 181.2(3)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | grants deducted from carrying value of capital assets and disclosed in the notes were reflected on the balance sheet | 98 |
Paragraph 181.2(3)(b)
Administrative Policy
19 January 2005 External T.I. 2004-0081001E5 F - Réserve de valorisation d'une coopérative
S. 149.1 of the Quebec Cooperatives Act provided that certain cooperatives could set up an “enhancement reserve” to value the use of the cooperative's services. CRA indicated that “an amount credited by a cooperative as an enhancement reserve would constitute a reserve for the purposes of Part I.3.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 135 - Subsection 135(4) - Allocation in Proportion to Patronage | question of fact whether distributions of enhancement reserves are allocations in accordance with patronage | 140 |
15 April 2003 Internal T.I. 2002-0176687 F - IMPOT DES GRANDES SOCIETES AVANCES
Customers of the corporation paid for services in advance, which the corporation showed as a liability on its balance sheet but deducted as a reserve in computing its income pursuant to s. 20(6). After finding that such amounts were not a reserve described in s. 181.2(3)(c), and in finding that they were includible in taxable capital pursuant to s. 181.2(3)(b) as “advances,” the Directorate stated:
The word "advance" … denotes, inter alia, the lending of money or the payment of an amount against the price of a contract for services or goods, paid before the contract is performed, the services rendered or the goods delivered.
… [I]n this context … the consideration to be received by customers is … the XXXXXXXXXX service offered by the corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(c) | prepaid revenues deducted under s. 20(6) were not a reserve | 185 |
Paragraph 181.2(3)(c)
Cases
ADP Canada Co.(Canadian Automatic Data Processing Services Ltd.) v. Canada, 2009 DTC 5091, 2009 FCA 117
The taxpayer, which provided payroll services for a fee, received funds from its clients in advance of the required remittance of such funds by it on their behalf. The funds received:
"were not 'advances' to ADP because they were neither a payment made to ADP before it was due nor an amount to be applied against the price of the service, paid before the service is rendered, nor an amount paid to ADP for an expenditure of ADP."
Administrative Policy
21 September 2007 External T.I. 2007-0229191E5 F - Agent de voyages & impôt de la partie I.3
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 deferred-revenue liabilities. CRA stated:
The term "advance" is not defined in the Act. It is our view that this term includes an advance payment. Funds received from clients and placed in trust under the Quebec and Ontario legislation referred to above are, in our view, prepaid and advances for the purposes of the definition of capital in subsection 181.2(3).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) - Paragraph 181(3)(b) - Subparagraph 181(3)(b)(i) | 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 | 109 |
17 June 2003 Internal T.I. 2003-0020677 F - PARTIE I.E IMPOTS DES GRANDES SOCIETES
Customers of the corporation paid for services in advance, which the corporation showed as a liability on its balance sheet. Such amounts would have been reserves under s. 181.2(3)(b) but for their being deductible under s. 20(1)(m), so that they were excluded under s. 181.2(3)(b). In rejecting the corporation’s submission that “since those amounts are expressly excluded from the calculation of the corporation's capital pursuant to paragraph 181.2(3)(b), those amounts cannot be included in any other capacity, including as advances pursuant to paragraph 181.2(3)(c),” the Directorate, before finding that the amounts were included in taxable capital under s. 181.2(3)(c), stated:
[T]he amounts received by the corporation from its clients in respect of the services to be rendered constitute advances for the purposes of taxation under Part I.3.
15 April 2003 Internal T.I. 2002-0176687 F - IMPOT DES GRANDES SOCIETES AVANCES
Customers of the corporation paid for services in advance, which the corporation showed as a liability on its balance sheet but deducted as a reserve in computing its income pursuant to s. 20(6). In finding that such amounts were not a reserve described in s. 181.2(3)(c), and before finding that they were includible in taxable capital pursuant to s. 181.2(3)(b), the Directorate stated:
[W]here a term in Part I.3 is derived essentially from accounting nomenclature, such as reserves, allowances, allocations and other surplus, the accounting treatment of the item in question will be used to decide whether the item is included in the capital calculation. On the other hand, the Agency is of the view that the legal form should continue to be considered with respect to items that are to be included in the capital calculation as loans, advances or debts.
Based on this proposition, we are of the view that the amounts in dispute do not constitute reserves for accounting purposes, nor do they fall within the definition of "reserves" as set out in subsection 181(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) - Paragraph 181.2(3)(b) | prepaid revenues were an “advance” | 132 |
5 February 2003 External T.I. 2002-0178405 F - PARTIE 1.3 CHEQUE DEPOT EN CIRCULATION
IT-532, para. 34 provides that bank overdrafts must be included in computing loans or advances, and that outstanding cheques are taxed only if they exceed funds on deposit. How are outstanding deposits treated, and how is capital determined when a bank overdraft is reflected in the financial statements and this overdraft results from a bank overdraft and outstanding cheques subject to the Civil Code of Québec? CCRA responded:
[A]n outstanding deposit [which] is an amount recorded on deposit in the depositor's accounts but not yet cashed by the bank or recorded in the depositor's bank account … can only increase the balance in the bank account to which the deposit relates or reduce the related bank overdraft. …
[O]utstanding cheques … are not in themselves loans or advances since the remittance of a simple cheque is not a payment. According to the Code, the date of payment of a debt settled by cheque is deemed to be the date on which the cheque is honoured or discharged by the bank, which is normally the date on which the cheque in question is debited from the debtor's account.
Therefore, book debts that have been reduced by outstanding cheques on the date of the end of a fiscal period cannot be considered to have been paid on that date for the purposes of the tax under Part I.3 of the Act. However, given that under subsection 181(3), the amounts to be used for Part I.3 tax purposes are those shown on the balance sheet presented to shareholders, the CCRA is of the view that amounts of indebtedness that are the subject of outstanding cheques can only be included in the calculation of capital under subsection 181.2(3) up to the amount reflected in the balance sheet, usually in current liabilities as an overdraft or "excess of outstanding cheques over the bank balance".
…[T]he taxpayer must compute capital by making a reasonable allocation of the overdraft between the underlying debts so as to best reflect the actual debts that make up the bank overdraft in the financial statements.
5 February 2003 External T.I. 2002-0178415 F - PARTIE 1.3 AVANCES SUR CONTRAT
Regarding the consequences of the PCL Construction decision (2000 DTC 2624), which it described as concluding that amounts in PCL’s deferred revenue balance that corresponded to amounts received at the end of the financial year and that constituted advances should be included in the calculation of capital, CCRA stated:
[I]n general, the only amounts reflected in an item of deferred revenue income that must be included in capital pursuant to paragraph 181.2(3)(c) of the Act are amounts received by the taxpayer that constitute advances.
18 September 2001 External T.I. 2001-0095265 F - TAXE SUR LE CAPITAL
Does the bank overdraft (on the balance sheet) created by the outstanding cheques of a corporation (which is governed by the Civil Code of Quebec) constitute loans and advances that must be included in taxable capital?
CCRA indicated that outstanding cheques do not in themselves constitute loans or advances, as the delivery of a cheque does not constitute a payment under the civil law (except for certified cheques). However, in light of s. 181(3), debts that are the subject of outstanding cheques at the end of a fiscal period must be increased by the amount of those cheques up to the amount of the bank overdraft on the balance sheet that is attributable to outstanding cheques.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Payment & Receipt | in Quebec, a cheque is not payment until the debtor’s account is debited | 116 |
Paragraph 181.2(3)(f)
Administrative Policy
11 May 2005 Roundtable, 2005-0118731C6 F - Contrat avec une société d'affacturage
A factoring company advances sums to Corporation A at a discount to the face value of the discounted receivables, and then applies the amounts collected to reduce the advance amounts. For accounting purposes, the accounts receivable remain on Corporation A's balance sheet and the amount received is recorded in current liabilities as an item due to the factoring company. Should the amount owing to the factoring company be included in the capital computation under s. 181.2(3)? After noting the distinction between “loans and advances” and “all other indebtedness” in ss. 181.2(3)(c) and (f), CRA stated:
"[I]indebtedness " has a broader meaning than the term "loans" since it includes not only the lender-borrower relationship but also a seller-buyer transaction. Indebtedness means an obligation to pay a sum of money. A loan is usually understood as the delivery to one party and receipt by another party of a sum of money which it has been agreed, expressly or impliedly, will be repaid with or without interest. The term "advance" has two possible meanings, namely that of a loan in the proper sense of the word and that of a deposit to be applied to the price of a contract before it is performed.
Paragraph 181.2(3)(g)
Administrative Policy
14 April 2010 Internal T.I. 2009-0347511I7 F - Partie I.3 - Société de personnes
A Quebec crown agent was a member of a limited partnership (the “LP”) and held LP debt. In finding that s. 181.2(3)(g) should be applied on the basis that a corporation (the Quebec government) was thereby a member of the LP and held the debt, the Directorate first noted:
Subsection 248(1) defines a corporation for the purposes of the Act as [TaxInterpretations translation of French definition] "except in the term “partnership”, means a legal person, including a company.” It therefore follows that XXXXXXXXXX, being a legal person under its incorporating statute, is a corporation for the purposes of the Act.
The Directorate then noted that the interest in the LP held by the Crown agent and the debt owing to the Crown agent were property of the Quebec government, and stated:
Therefore, it is the Government that must be considered for the purposes of subparagraph 181.2(3)(g)(i).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation | Quebec government is a corporation | 34 |
Subsection 181.2(4) - Investment allowance
Cases
Federated Cooperatives Ltd. v. The Queen, 2001 FCA 217, 2001 DTC 5414
Bankers acceptances held by the taxpayer were not "advances" to the issuer because the issuer had no obligation to repay the same sum of money to the taxpayer or to provide any goods or services, and its only payment obligation to the taxpayer was a contingent obligation to pay the face amount if the accepting bank failed to do so. Furthermore, the bankers acceptances were not bonds, debentures, notes, mortgages or similar obligation because the bank alone was primarily liable to pay the holder. Sharlow JA stated:
[A] banker's acceptance is not an obligation of the issuer that is similar to a bond, debenture, note or mortgage. Each of those is a document evidencing indebtedness of the maker in the form of a promise to pay, an obligation for which the issuer is primarily liable. The issuer of a bill of exchange that has been accepted by a bank is only contingently liable to pay the holder.
The result that no investment allowance was available conformed with a possible policy objective of excluding short-term bank debts from eligibility.
See Also
Federated Co-operatives Ltd. v. The Queen, 2000 DTC 1946 (TCC), aff'd supra.
Bankers' acceptances purchased by the taxpayer were not eligible for an investment allowance. In finding that they did not qualify as an "advance" under s. 181.2(4)(b), Mogan TCJ. stated (at p. 1951):
"An 'advance' in the context of that phrase ['loans and advances'] is an amount paid before the completion of an obligation for which it is to be paid; or an amount paid before the performance of a resulting reciprocal obligation. In that sense, an amount paid by the Appellant for the purchase of a BA is the cost of an investment and not an advance to another corporation."
In finding that bankers' acceptances were not notes for purposes of s. 181.2(4)(c), Mogan TCJ. noted that the accepting bank is the party primarily liable to the holder in due course of a BA and found that as a BA is not a debt instrument, it is not described in s. 181.2(4)(c) which is concerned only with obligations having the character of a debt.
TransCanada Pipelines Ltd. v. Minister of Revenue (1992), 62 O.A.C. 105
The respondent (a pipeline company) agreed to purchase certain minimum quantities of gas each year. If it was unable to take delivery of the agreed minimum it was nevertheless required to pay the producer the full minimum purchase price and it correspondingly became entitled to credit for such payments against future purchases of gas.
Because the respondent expected in making the required minimum payments that it would, in the fullness of time, call for a delivery of an equivalent amount of gas for which it had so paid, such minimum fell within dictionary definitions of 'advance' as a 'payment [made] beforehand or in anticipation' and a 'payment made before ... the completion of an obligation for which it is to be paid' (at p. 107). Because the object of the contracts was to secure gas for the respondent's business, it also followed that the advances were "investments", i.e., expenditures "for future benefits or advantages".
Administrative Policy
14 November 2000 Internal T.I. 2000-005117 - INVESTMENT ALLOWANCE COMBINED SURPLUS
In the situation where a parent has made a contribution of capital to a subsidiary (in this case a foreign subsidiary), GAAP views the resulting increase to the investment account of the parent in the subsidiary as a reflection of the enhancement of the value of the shares held by the parent rather than as a recharacterization of the contributed surplus as share capital. Accordingly, the full amount of the "investment in subsidiary" account will be eligible for the investment allowance.
21 March 2001 Internal T.I. 2000-0056297 - TENANT INDUCEMENT INVESTMENT ALLOWANCE
Where landlords agree to pay tenant inducements over a period of twenty years, the taxpayers would account for the amounts payable as "secured receivables" on the balance sheets in some instances, and in others as deferred income. Such amounts would not be loans or advances for purposes of s. 181.2(4)(b) because there is no lender and borrower relationship between the taxpayer and its landlord. "In order for there to be a loan at law, it is necessary that there be a delivery of the subject of the loan by the lender to the borrower and that there be an obligation on behalf of the borrower to return the subject matter of the loan".
IT-532 "Income Tax Act, Part I.3 - Tax on Large Corporations"
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 0 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) | 0 |
22 February 1996 Internal T.I. 9604507 - PART I.3 - CAPITAL LEASES & CONDITIONAL SALES AGREEMENTS
A lease obligation reflected as an asset on the balance sheet of a lessor corporation is not eligible for an investment allowance as a loan or advance.
The amount owing by the purchaser under a conditional sale agreement will not be eligible for an investment allowance to the vendor unless the purchaser issues a note to the vendor.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 181 - Subsection 181(3) | 62 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) | 46 |
9 January 1996 Ministerial Correspondence 952924A - CASH CONCENTRATION ACCOUNTS & PART I.3
Inconclusive discussion of group concentration accounts.
10 August 1995 External T.I. 9518455 - STRIPPED BONDS - ELIGIBLE FOR INVESTMENT ALLOWANCE?
"Where a corporation acquires a 'stripped bond' (i.e., a bond certificate from which the interest coupons have been detached prior to maturity), a detached coupon, or an undivided interest in a right to receive principal or interest in respect of a bond, such bond, detached coupon or undivided interest will be eligible for an investment allowance as long as the underlying bond, on the assumption that it had not been stripped, would have otherwise been eligible."
27 June 1994 External T.I. 9410195 - LARGE CORPORATION TAX & CONDITIONAL SALES CONTRACTS
Where a party (other than a financial institution) acquires a note issued by the purchaser under a conditional sales agreement, the note will be included in the party's investment allowance.
Revenue Canada Round Table TEI, 16 May 1994, Q. 6 (C.T.O. "Part I.3 Tax - Deferred Revenue")
Generally, where an amount of expenses is paid before it is due by one corporation to another corporation that is not a "financial institution", and reported on the annual financial statements as a deferred charge it will be considered to be an advance pursuant to s. 181.2(4)(b).
93 CPTJ - Q.15
RC will consider applying s. 245(2) where the primary purpose of a transaction is to obtain a tax advantage through a temporary acquisition of assets which qualify for the investment allowance under Part I.3.
December 1992 B.C. Tax Executives Institute Round Table, Q. 7 (October 1993 Access Letter, p. 479)
Prepaid expenses paid to another corporation (other than a financial institution) will qualify for inclusion in the investment allowance of the payor as an "advance".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | 48 | |
| Tax Topics - Income Tax Act - Section 181.2 - Subsection 181.2(3) | 49 |
27 September 1991 T.I. (Tax Window, No. 11, p. 21, ¶1510)
A promissory note issued by a corporation (other than a financial institution) is included in the investment allowance even if the notice is guaranteed by a bank or other financial institution.
27 September 1991 T.I. (Tax Window, No. 10, p. 19, ¶1486)
Bankers acceptances are not "loans and advances" and accordingly do not qualify for the investment allowance.
25 June 1990 T.I. (November 1990 Access Letter, ¶1544)
Instruments issued by foreign corporations also are included.
Paragraph 181.2(4)(a)
Administrative Policy
11 May 2005 Roundtable, 2005-0118691C6 F - Certificat américain d'actions étrangères
Does an American Depository Receipt represent shares of a corporation so that the certificate will qualify for the s. 181.2(4)(a) deduction? CRA responded:
A share is a bundle of rights and privileges accorded by the articles of incorporation or directors under the relevant legislation. It must therefore be determined whether the holder of an American Depositary Receipt has all the attributes of ownership of the shares that the certificate represents in order to deduct the amount of the investment in the American Depositary Receipt.
Paragraph 181.2(4)(b)
Administrative Policy
25 March 2002 T.I.
A lease receivable reported on the financial statements of a lessor that is not a financial institution generally will not be eligible for an investment allowance; and the lessee's lease payable generally will be considered to be other indebtedness in respect of a lease which is excluded from inclusion in the computation of capital pursuant to s. 181.2(3)(f).
Paragraph 181.2(4)(d.1)
Administrative Policy
21 February 1994 External T.I. 9333035 F - Investment Allowance - Large Corporations Tax
Where one or more of the members of a partnership is an individual, the pro-rata capital component of loans made to the partnership must be reported as capital by the corporate partners, whereas the loan will fail to qualify for an investment allowance in the hands of the corporate lender.