Words and Phrases - "reserve"
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 |
28 January 2021 Internal T.I. 2019-0817641I7 - Acquisition of rights to pension surplus
A portion of the purchase price paid for the acquisition of a business of the Seller by the Purchaser was allocated to the actuarial surplus in a defined benefit pension plan (the “Plan”) for which the Seller was the sponsor and employer, with the Purchaser being assigned the Seller’s obligations under the Plan. The plan permitted the employer to use actuarial surplus to reduce contributions, or to be returned to the employer to the extent allowed by the Act and pension law. Any surplus assets were to be returned to the employer on winding-up the Plan. These potential entitlements passed to the Purchaser as the new sponsor.
- In finding that the amount allocated to the actuarial surplus was a capital expenditure that did not qualify as an eligible capital expenditure (ECE) (and would not have qualified as the cost of a Class 14.1 property) had the acquisition occurred after 2016, the Directorate indicated that:
- Having regard for the exclusion from ECE (or Class 14.1) for an amount that is not deductible by virtue of a specific provision other than s. 18(1)(b), such amount was excluded by s. 18(1)(e), which prohibited the deduction for a reserve (“described by the courts as something set aside that can be relied upon for future use”) given that “any actuarial surplus in this case can be applied as a contribution holiday to relieve the Purchaser from its future contribution obligations”
- Furthermore, there the exclusion under s. 78(4) would also apply because it prohibits the deduction of an amount for pension benefits which will be paid more than six months after the current taxation year, including (in this context) the use of surplus to cover the employer’s current service costs.
- The exclusion for “an amount that is the cost of … an interest in a trust” also applied since the Purchaser acquired an equitable interest in the Plan, i.e., there it could potentially take a contribution holiday, receive a return of contributions on a winding-up of the Plan, and potentially receive the surplus in other circumstances.
- Regarding the specific exclusion in Class 14.1 of “goodwill,” this was defined in TransAlta as “an unidentified intangible asset,” whereas the surplus here instead “was supported by actuarial estimates and was objectively quantifiable,” “represents real value that can be applied to offset the employer’s contribution obligations for a number of years” and “[u]nlike goodwill … can be separated from the employer’s business if, as in this case, the plan terms permit surplus to be returned to the employer when the appropriate regulatory procedures are followed” and, thus, “was not an unidentified intangible.”
- The surplus amount would also not be deemed goodwill under s. 13(35) because of failure of the condition in s. 13(35)(a) (it would represent the cost of a property, e.g., the right to apply actuarial surplus to contribution obligations under a defined benefit pension plan) and failure of the condition in s. 13(35)(c) (it was not otherwise deductible because of s. 18(1)(e) or 78(4)).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(e) | purchased actuarial surplus was a reserve | 195 |
| Tax Topics - Income Tax Act - Section 78 - Subsection 78(4) | s. 78(4) exclusion would apply to the purchase of actuarial surplus | 191 |
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(35) | purchased actuarial surplus was not deemed goodwill under s. 13(35) | 222 |
Fèdèration des Caisses Populaires Desjardins, 2000 DTC 1585 (TCC), rev'd on second (statutory contribution) issue 2002 DTC 7413 (FCA)
The employees of the taxpayer earned vacation leave during a reference period running from May 1 to April 30 each year. When they took their vacation leave in the following twelve-month period, they would receive generally 2% of all their earnings during the reference period for each week of leave taken.
Before going on to find that the taxpayer was able to deduct, in each calendar taxation year, the vacation leave that had accumulated by employees to December 31 (estimated as 8% of the current year's payroll) on the basis that the accrued vacation pay represented a "real legal liability that exists during the reference year but will be paid in a future year", Lamarre TCJ. stated (at p. 1595):
"As regards the meaning to be given to the word 'reserve' as used in the English version of paragraph 18(1)(e), in my view it cannot have any meaning other than the one given to the word 'provision' in French terminology." Lamarre TCJ. went on to find that various statutory contributions could not be deducted until paid because the "obligation to make those employer contributions does not arise until the vacation pay is actually paid" (p. 1596) and noted that where only a "suspensive condition" exists there is "not yet any actual relationship between the future creditor and the future debtor". Such a relationship existed for the accrued vacation pay, but not the employer statutory contributions.
Leonard v. The Queen in Right of British Columbia, [1984] 4 WWR 37 (BCCA)
The reference in s. 87(b) to a "reserve" does not include surrendered lands.
It was stated, obiter, with respect to s. 87(a) that a band "is probably exempt from capital gains tax on the sale of absolutely surrendered lands."